To Tell the Truth

Sell-Side M&A Versus Estate Planning

We are constantly hearing that a family business owner is “going through an estate planning” initiative to understand their potential value. In many cases, the value created from a competitive M&A process is a better use of time.

The professional industry supporting estate planning has a good reputation. It has a comprehensive network of knowledgeable advisors with strong academic backgrounds, subject matter expertise and it is an area that is heavily regulated. In a broad sense, these estate planning professionals include accounting, financial advisors, commercial bankers, real estate, community stewards, wealth planners and legal advisors. Please note, the author has great ties with members of these professional organizations.

Let’s not forget the “non-professional” members supporting the business owner. This group includes the multi-generational extended family members. This mix includes current and former spouses, uncles, aunts, in-laws, children and grandchildren of the owner.

An evolving third element in the estate planning game involves the university and religious institutions that are extremely active courting the business owner. Also not to be forgotten are the private undergraduate and elementary schools looking for a charitable contribution when your grandchild graduates from third grade.

• Do these various groups have an impact on how the value of the business is determined for estate planning purposes? You bet they do!

• Do these various groups attempt to sway discussion on the value determination?

Unfortunately, yes.

• Do these various groups agree with the ultimate decision regarding valuation? No.

Enter your experienced investment banker to lead a sell-side M&A process for the business owner. Creating a competitive M&A sell-side process will provide a value that the market is willing to pay for your business. I would like to review some actual advisory scenarios involving families:

Case Study #1

• At the passing of the parents, CEO is gifted additional shares to become 51% majority owner of family business. Two (2) siblings (not involved with the business) given 49%, in aggregate.

• Siblings want to be “bought out.”

• Three years later, with high professional expenses deployed and multiple estate valuations rejected, an agreement for a valuation is agreed upon with CEO now controlling 100%.

• Six months later, the company is sold for 2x above the estate planning valuation.

• Professional estate planning advisors followed the conventional conservative practice to generate the valuation.

• Conversely, the M&A market spoke loud and clear that the company’s niche was more valuable in a competitive process.

Case Study #2

• Founder passes and provides children (3) from first family 58% ownership, while his stepchildren (3) receive 42% of the family business.

Board of Governors of the Federal Reserve System (US), Industrial Production: Total Index [INDPRO], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/ series/INDPRO, June 12, 2023.

Board of Governors of the Federal Reserve System (US), U.S. Dollars to Euro Spot Exchange Rate [DEXUSEU], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DEXUSEU, June 12, 2023.

• Founder had established a 70% super majority vote requirement on all business initiatives. Since this threshold was established 35+ years ago, the 4 children/ stepchildren have never had a vote pass due to the 70% threshold.

• Professional estate planning advisors followed the wishes of the founder and saddled the next generations with a challenging burden at exit.

• The investment bankers were highly confident the business market value of $200+ million would be attainable.

Please consider all your options and tools when considering your estate planning initiatives. We would encourage you to ask your team of professional advisors to invite an investment banking team to speak with you and your family to further evaluate your options.

This article has been prepared solely for informational purpose. This article does not constitute an offer, or the solicitation of an offer, to buy or sell any securities or other financial product, to participate in any transaction or to provide any investment banking or other services, and should not be deemed to be a commitment or undertaking of any kind on the part of Wiley Bros. –Aintree Capital, LLC (“WBAC”) or any of its affiliates to underwrite, place or purchase securities or to provide any debt or equity financing or to participate in any transaction, or a recommendation to buy or sell any securities, to make any investment or to participate in any transaction or trading strategy. Any views presented in this article are solely those of the author and do not necessarily represent those of WBAC. While the information contained in this commentary is believed to be reliable, no representation or warranty, whether expressed or implied, is made by WBAC, and no liability or responsibility is accepted by WBAC or its affiliates as to the accuracy of the article. Prior to making any investment or participating in any transaction, you should consult, to the extent necessary, your own independent legal, tax, accounting, and other professional advisors to ensure that any transaction or investment is suitable for you in the light of your financial capacity and objectives. This article has not been prepared with a view toward public disclosure under applicable securities laws or otherwise.

By Bob McIlvaine President The McIlvaine