Contemplate your life after the sale. Many business owners regret selling their business because they never really understood what their life would look like after the sale. If you have the drive and work ethic of a business owner, playing golf all day is probably not going to cut it. What will your next big adventure be? How will you stay motivated and engaged? Figure this out long before you sign the purchase agreement.
As a part of our series about “Five Things You Need To Know If You Want To Build, Scale and Prepare Your Business For a Lucrative Exit, I had the pleasure of interviewing Eric Czepyha, Director, Business Services, Northern Trust.
Eric oversees Northern Trust’s national strategy for advising business owners and their families. He has more than 15 years of experience advising clients in his capacity as legal counsel, financial advisor, board member and corporate trustee. During the course of his career, Eric has worked with clients on a variety of business issues, including financial analysis and valuation, legal analysis and contract negotiation, pre-transaction planning, mergers and acquisitions, corporate governance and succession planning.
Prior to joining Northern Trust, Eric was the Head of Advice, Planning and Fiduciary Services at BNY Mellon Wealth Management where he was responsible for overseeing global wealth advisory, fiduciary services, and the national practice areas for business owners and family law. Prior to BNY Mellon, Eric served as Head of Trusts & Estates Specialty Assets at J.P. Morgan, where he oversaw a team of asset management professionals managing client investments in real estate, oil and gas, and closely-held businesses. Prior to J.P. Morgan, Eric was a Director in the Mergers and Acquisitions Group at Barclay’s Investment Bank and an associate in the Mergers and Acquisitions Group at Skadden, Arps, Slate, Meagher & Flom.
Eric received his bachelor’s degree from Columbia University and law degree from Harvard Law School. He is a member of the New York Bar. He is also the prior President of the National Trust Closely Held Business Association.
Thank you so much for doing this with us! Before we dive in, our readers would love to learn a bit more about you. Can you tell us a story about what brought you to this specific career path?
When I was a young investment banker in New York City, our firm typically would advise large, public companies. Occasionally, however, I would have the opportunity to represent a private business owner. I was always fascinated with how these individuals started and grew their highly successful businesses. Although many of these business owners were brilliant at day-to-day operations and management, they had not seriously thought about what would happen to the company, and their family’s financial future, when they were no longer around. I chose this career path because I wanted to help business owners build a legacy for their family over the long term — whether that meant eventually selling their business or passing it on to the next generation.
Can you share a story about a mistake you made when first starting, and what lesson you learned from that?
I was a first-year attorney right out of law school representing a client who was selling his multi-billion-dollar business. We booked a conference room on Saturday for an all-day negotiation session with a potential buyer. Our legal assistant called in sick, so it fell on me to order lunch for everyone, and I totally dropped the ball. Lunch arrived several hours late and consisted of a paltry array of convenience store sandwiches. My boss at the time “kindly” reminded me that transaction negotiations do not go well on an empty stomach. Lesson learned — the next day I ordered an amazing spread for lunch, and to this day I always make sure our clients are well fed.
Can you please give us your favorite “Life Lesson Quote”? Can you share how that was relevant to you in your life?
I have always liked the quote attributed to Plato, “Wise men speak because they have something to say. Fools because they have to say something.” It reminds me of the importance of listening to our clients first before we deluge them with our insights. Advice isn’t worth much if it misses the mark on what the client truly cares about and the problems they are trying to solve.
Can you tell us about how you help build and scale businesses in your current role?
We do a lot of work with business owners around family and corporate governance — creating the right framework for who owns shares of the business, how information about the business is communicated with shareholders and family members, and what corporate governance is in place to identify, motivate and groom younger team members for senior management positions in the future. Although it may seem like this level of formality and structure is overkill when a business is just getting started, building the foundation early on will pay significant dividends over the years as the business scales.
Can you share with our readers the “Five Things You Need To Know If You Want To Build, Scale and Prepare Your Business For a Lucrative Exit”? Please give a story or example for each.
- Get your family on board. Make sure your family is aligned as much as possible on your long-term plans for the business and how a sale might impact everyone personally, particularly if family members own shares of the company and/or work in the business. In some cases, we have seen lack of family consensus hold up a sale transaction. In others, it can make for a very uncomfortable Thanksgiving dinner post-sale.
- Plan your taxes. Make sure your estate plan is in good shape long before selling your business. We have seen many business owners procrastinate on estate planning until right before the sale, at which point it is probably too late. Understand the tax implications of a sale and whether there is anything you can do at the personal level (wealth planning) or corporate level (entity selection) to increase your post-tax sale proceeds. This pre-planning work is particularly important these days, given the potential for federal tax policy changes on the horizon. Our Northern Trust Institute’s recent survey of business owners found that tax resiliency is a leading concern, with 45 percent of respondents have considered a relocation of their business headquarters, primary residence, or both, to reduce the tax impact.
- Put your company through the “stress test” of due diligence. Selling your business can be an arduous process and it can take a toll on your management team. I have seen several business owners do a “mock sale” where they put their team through the test of a buyer performing due diligence on the business. It takes time, but as a business owner you will learn a lot about your company (and your employees). You will also be much more prepared when selling the business later on.
- Build a succession plan you can stand behind. In our experience, buyers are willing to pay more for a company with a robust succession plan that includes a well-designed board, incentives for key senior management, and detailed employment policies for hiring, promoting and compensating employees. Business owners with succession plans in place are twice as likely to believe their board adds value to the business, compared to counterparts without succession plans (98 percent versus 53 percent). We recently advised a business owner of a large private company on how to “modernize” his board of directors from a collection of family members to a combination of family, independent board members, and senior executives. A few changes at the board level created tremendous long-term value for his business.
- Contemplate your life after the sale. Many business owners regret selling their business because they never really understood what their life would look like after the sale. If you have the drive and work ethic of a business owner, playing golf all day is probably not going to cut it. What will your next big adventure be? How will you stay motivated and engaged? Figure this out long before you sign the purchase agreement.
In your experience, is there a difference in approach for building a service based business versus a product based business when you have the intent to eventually sell the business. Can you explain?
I think the fundamental principles, some of which are described above, are the same no matter what type of business or industry you are in. That being said, for service-based businesses where your main asset is your people, it is even more important that the owner builds out a comprehensive succession plan for the business. Recognize top performers and create incentive structures to keep them around for the long haul. Implement and communicate clear policies for how to advance in the company regardless of whether you are a family member or not. Identify the next generation of business leadership and groom them for the roles you would like them to grow into one day.
How does one go about the process of finding a buyer?
Although some business owners opt to negotiate the sale of their business with one buyer (for instance, if they received an unsolicited offer from a private equity firm), in many instances we advise business owners to hire an investment bank to run a competitive sale process, whereby the company is presented a curated list of potential buyers, and the business owner can choose the winning bidder after several rounds of bidding and negotiation.
The bidding process takes time, but it often leaves business owners with the peace of mind that no stone was left unturned. For instance, I represented a manufacturing company several years ago and the business owner was convinced that he personally knew every potential buyer for his company. We convinced him to hire an investment bank nonetheless, and he ultimately ended up selling his business to a new buyer sourced by the investment bank.
How can one decide if it is better to build a business in order to exit, or if it is better to stick around for the long term and let the company bring in residual income, or if it is better to go public?
It is hard for any business owner to answer this question early on, because you never know where life’s path will take your family and your business. Many business owners we have met said they would never sell, while others were intent upon selling, and a few years down the road circumstances change. The key question to ask yourself is, “What does this business mean for me, my family, and my legacy?” If it is purely a financial investment, whether to sell, retain, or IPO is primarily a financial question of long-term cash flow and internal rate of return (IRR). If, as in many cases, the business means more than financial return, you will need to evaluate the decision through a multi-faceted approach that takes your financial goals into account, as well as the personal and financial impact of a sale or IPO on your family and employees.
Can you share a few ways that are used to determine a good selling price for the business?
We advise clients to think of the selling price of your business in two ways — 1) the price others are willing to pay for your business, and 2) the price at which you are willing to sell.
The first depends on the market. A good avenue for determining the best market price for your company is what I mentioned earlier — hire a well-qualified investment bank to run a sale process and solicit bids from potential buyers.
The second depends on the business owner. Our goals-based planning team spends a lot of time working with business owners to help them determine at what price they would need to sell their business in order to maintain their lifestyle and achieve long-term financial goals (second home, travel, philanthropy, etc.). Once the business owner comes up with “their number,” they have an incredible amount of negotiating leverage with buyers because they know the sale price required to feel confident they are making the right decision for the long term.
If you could inspire a movement that would bring the most amount of good to the most amount of people, what would that be?
I would love to be part of a movement that helps kids understand the meaning of wealth at an early age. What is the purpose of wealth? What is the difference between being wealthy and being happy? If you had 1,000 dollars, how much should you save, how much should you spend, and how much should you give to others? I believe if we can get kids to start thinking about these questions early on, they can begin to develop the right relationship with wealth as they grow up, and they will view wealth as a means to living their best possible life, rather than as an obligation or a burden.
How can our readers follow you on social media?
Thank you so much for joining us. This was very inspirational.