|Counseling clients on cashing in from a business sale
Here’s a look at the questions you should be asking clients years in advance of a liquidity event.
August 7, 2013
Business owners may have started their company to pursue a passion, or to escape corporate America, but all entrepreneurs long for the day when they can cash in on their efforts through some liquidity event. The most trusted financial adviser most business owners have is their CPA, so accountants need to ensure that they are providing sage counsel to their clients on liquidity strategies.
One question CPAs should be asking every client every year is: “What is your exit plan?” The answer may evolve or change over time, but if there is no focus on the end game, the inevitable ownership transition will not optimize the client’s objectives.
CPA firms can provide many services, from estate planning to business valuation, to help clients minimize the tax consequences of a liquidity event and understand what metrics they need to focus on to achieve the proceeds they desire. But to truly serve clients’ interests, accountants need to coach them to assemble a team of advisers. Business owners need a complete advisory team that includes their CPA, lawyer, and investment banker (or business broker, depending on the company’s size).
I have worked with about 200 business owners on planning for or executing a liquidity event, and the most satisfied ones are those that had a full team working with them years in advance. Waiting until the year the owner wants to exit to assemble this team would be like a football team waiting until the week before the first game to begin practice. A lot goes into a successful liquidity event, and much of the work needs to be done years in advance.
Questions to ask
Here is a list of questions I ask when first meeting a business owner. CPAs should be asking their clients some of these same questions as well:
Making the transition
There may be a natural inclination for the client and his or her business advisers to transition ownership to kids or to the company’s existing managers. That satisfies familial or loyalty obligations for the client—and those types of transitions lessen the risk that new ownership will change advisers. But neither family nor existing management typically have the resources to allow the founders to cash in on their efforts.
Less than one-third of companies successfully make an internal transition, and many of those that do wish they hadn’t. If you are to be the true “trusted financial adviser” to business owners, you need to have candid conversations annually with them about their liquidity objectives. That is the most important financial advice you could ever give them.
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Michael Jacobs, CEO of Jacobs Capital, is the former head of corporate finance policy at the U.S. Treasury Department. A finance professor at Kenan-Flagler Business School at the University of North Carolina at Chapel Hill, Jacobs has run M&A practices for more than 20 years.