By Daniel J. Loewy, Research Director; and Robert A. Weiss, CFA, Director; Wealth Management Group, Bernstein Investment Research & Management

SELLING A PRIVATELY HELD BUSINESS may be the most important financial event in an owner’s life. Identifying personal goals in advance is an important element in helping maximize the deal’s value.

In the article below ,“The Art Before the Deal—Maximizing Personal Wealth When Selling a Business,” the Wealth Management Group at Bernstein Investment Research & Management share the firm’s authoritative research on a number of critical wealth management and pre-transaction planning issues.

Bernstein, one of the country’s largest, independent private client investment managers, was founded in 1967 as a discretionary investment manager for private clients. Well known for the integrity, accuracy, and independence of its research operation, Bernstein has the largest independent research team on Wall Street. The firm manages over $500 billion for private clients, institutions and pension funds. Bernstein does no investment banking, no underwriting, and no M&A.

In Bernstein’s Washington, DC office, Michael Bono and Joseph Perta, have formed a specialized M&A team to assist intermediaries (investment bankers, M&A advisors, transaction attorneys, and accountants) in addressing the investment needs of business owners who are selling or re-financing.

The article below appeared in the November 2004 edition of the FOCUS Newsletter.

Because selling a privately held business may be the most important financial event in an owner’s life, the Wealth Management Group at Bernstein Investment Research & Management has put together research on these critical issues:

• The impact of key deal terms on the owner’s wealth; the highest offer may not be the best.
  
• How estate planning prior to the sale can enhance the value created.
  
• Quantifying spending needs so that plans can be implemented to meet other financial goals.
  
• The financial planning implications of liquidity strategies other than a full sale.

Summary of Significant Bernstein Research Conclusions
For many owners of privately held companies, selling their business represents the culmination of years of work and offers the prospect of financial security for life. Identifying personal goals in advance can help maximize the deal’s value.

Our experience has shown, however, that without strategic financial planning prior to the sale, an owner may not realize its full potential. By defining personal objectives and putting a few key strategies in place, an already lucrative transaction can become a golden opportunity – without slowing down the sale process.

Bernstein Has Developed an Analytical Framework Designed To Identify the Critical Alternatives When Selling a Business

By integrating potential deal terms, key tax- and estate-planning strategies, and the business owner’s financial goals, the owner and his team of advisors can, we believe, most effectively extract maximum value from the deal. While the model is best used on a personal basis, our research has uncovered some global themes:

The sale of a business often allows the owner’s spending, legacy, and philanthropic goals to be met – but not always, particularly if strategies to meet them are not mapped out at the beginning. The solution is to ensure that sufficient assets will be set aside to address the owner’s top financial priority (often his spending needs), and then work out plans for meeting his other critical needs – all prior to the sale.

Generating the most value from a transaction is not necessarily tied to finding the highest sale price. Often, the maximum benefit can be gained by making a few critical decisions in advance. These decisions include:

• Weighing the safety of cash against the tax deferral and greater return potential of a stock transaction. A stock deal may seem more lucrative, but its additional risks need to be factored in, including exposure to price fluctuations before the deal is consummated and the imposition of a lockup period.
  
• Evaluating key estate-planning strategies, which often yield maximum benefit if implemented before rather than after the transaction. A careful evaluation of the owner’s goals and anticipated sale proceeds can help determine the types of family or charitable trusts to establish – whether to use a GRAT, a CRT, or both, for example – and the amounts to allocate.
  
• Considering various exit or liquidity strategies other than a straight 100% sale – such as the sale of a minority stake in one’s business, a leveraged recapitalization, or sale to an employee stock ownership plan. Key financial-planning questions arise with these strategies, including how much of the owner’s stake to sell.

Cooperation Is Essential

Investment-banking, tax, legal, and financial-planning experts each can play a critical role in preparing for a transaction. An integrated team is, in our view, imperative for putting in place the most effective strategies. The Bernstein team can be an important added value in helping clients to evaluate offers from the perspective of their future life needs.

Given the wide range of personal situations, tax- and trust-planning alternatives, tolerance for risk, and deal terms, the Bernstein team can provide a quantitative framework for understanding the trade-offs. Allowing a business owner to evaluate alternatives prior to implementing them can help owners and their advisors make the best decisions in each unique case, and that goes a long way toward providing peace of mind and getting the deal done.

You Can Download a PDF of the Full 28-Page Bernstein Research Booklet by Clicking on The Art Before the Deal Now

Printed copies of the booklet also are available from two of Bernstein’s financial advisors in its Washington, DC office, Michael Bono (bonoma@bernstein.com) and Joseph Perta (pertajm@bernstein.com, who have teamed up to work with intermediaries, business owners, and their professional advisors to help evaluate different transaction structures and their impact on a client’s ability to meet lifestyle and legacy goals. For more information, visit www.bernstein.com.