As we draw closer to the end of a business cycle, mergers & acquisitions activity in New Jersey is anything but quiet. The business lifecycle continues to accelerate, creating both pressure and disruption for business owners. Innovation across the state’s core industries has fueled further competition across the spectrum. At a time when organic growth has been slower over the past few years, companies have been turning to more acquisitive opportunities in order to continue to hit their growth trajectories and stave off new competitive entrants. This point is further illustrated in JPMorgan Chase’s 2019 Business Leaders Outlook survey, where a number of business owners have identified M&A as a catalyst for future growth.
Lester Pataki of JPMorgan Chase Commercial Banking.
What generates concern for business owners is often the uncertainty around the M&A or sale process and what the outcomes may be. The inevitable worries might include “Is now the right time? Will I get the maximum value for my business? What happens to me and my family after the ink is dry?”
Among the top ways to prepare for such an event, and to ease anxieties, are educating yourself on three key considerations as you prepare for a sale or restructuring.
Don’t underestimate the emotional side of the transaction
Business owners often focus on how to maximize transaction value and do not take the necessary steps to secure the best personal outcome from the sale of a business. Deciding to sell a business is a deeply personal decision. The right sale structure is often motivated by factors other than financial metrics, and can depend greatly on how the owner envisions their life post-transaction.
For these reasons, it is important to establish in advance the primary purpose, or intent, for your money — both the financial and structural outcome — before taking any other steps. Identifying a primary intent moves the focus on a company’s sale to the broader purpose of the financial and structural outcome, which can align overall wealth strategy and decision making with the individual’s or family’s goals.
Key questions to ask yourself:
- What’s the level of involvement you envision for yourself post-transaction? What level of control, or lack of, are you comfortable with?
- Do you have family members whose livelihoods are dependent on the business?
Know your options
Each business owner’s exit strategy may look different depending on the role they want to play post-transaction and how they want to structure their deal. Business owners need to marry their business and personal objectives to arrive at the best option. While selling is a common path for business owners seeking liquidity, it’s just one option. There are lots of ways to extract liquidity that are often overlooked.
Aside from a full sale of your business — a clean break — you might continue with an equity stake. With a minority controlled equity stake, you may contribute still to the company’s strategic operations if your goal is to still maintain some control. You may also consider a structured sale or employee stock ownership plan.
Key questions to ask yourself:
- What are the strengths and weaknesses of the business?
- Am I aware of what the industry multiples are/market value of my industry?
Ask the tough questions during planning — and do it early
Planning helps avoid risk to your business and your personal financial plans, and also keeps the peace among business partners, stakeholders and family. If an exit strategy is on the horizon, understanding economic conditions and trends is key. For example, technology is both an enabler and disruptor of business models and, in New Jersey, the bio and medical technology industries are growing apace. Having an informed view of the outlook for your business’ sector from a regional and industry point of view will be additive to understand the price value of the business.
Timing is also a critical consideration. Decision makers should be of sound mind, and not “under the gun” with time constraints or financial distress. Ideally, transaction planning begins as much as three to five years in advance of execution. When there is a compressed time period to finish the deal, the owner may not get the most out of their hard-earned equity interest, and may regret a strategic decision they could have handled differently.
Depending on the leadership structure of the business, you may be exposed to some unique risks. For example, if the No. 1 decision maker can no longer fill that role, what happens to the company’s operations? If the business is family-owned or operated, is there a logical succession plan in place? No matter what age an owner or business might be, this step is critically important.
Key questions to ask yourself:
- How will the talent, financial and operational executions function after the deal?
- Is there a succession plan in place for critical roles to support the business?
- Have you established procedures for conflict resolution and exits from the business to avoid disruption?
- Have you established a contingency plan in case of your incapacity or death?
J.P. Morgan Private Bank in New Jersey is run by Market Manager Alma DeMetropolis, who leads a team of local professionals that provide wealth management advice, strategies and services to successful individuals, family offices, foundations and endowments throughout the region. Lester Pataki is a managing director and middle market banking region manager for JPMorgan Chase Commercial Banking in New Jersey. He leads a team of commercial bankers who help local companies succeed at every stage of growth through tailored solutions, including credit and financing, treasury and payments and international banking.
