Preparing to sell your business
“Give me six hours to chop down a tree, and I will spend the first four sharpening the axe” (Abraham Lincoln/Anonymous woodsman)
This perhaps rather ominous adage, often attributed to Abraham Lincoln, rings true as we reflect on the conversations we regularly have with our entrepreneurial clients. Preparation is key as you approach the sale or listing of your business.
Yet we understand most business owners are so busy focusing on running their organisations that preparing themselves and their families for a sale can take a back seat. We strongly recommend, however, that this planning process starts as much as two years before the anticipated transaction.
The importance of giving early and detailed consideration to these matters cannot be overstated. Experience tells us that if they are left to chance, opportunities will be missed and both immediate and long-term financial returns will suffer as a result.
There are a number of key areas that we find can often be overlooked as you approach your transaction:
What are your family's short, medium and long-term goals and aspirations? What do you hope to achieve from the sale?
Is this the conclusion to a successful entrepreneurial career or the start of a series of entrepreneurial endeavours? Is this the realisation of a long-term aspiration to secure you and your family’s financial future and time to take some chips off the table, or is time to double down so you can continue to participate in any potential future upside in the business? Is it a combination of all these options?
Ascertaining what your goals are early on can have a material impact on the shape and form of the deal you agree to. Clarity regarding your destination can make the journey much clearer and help you be decisive at critical moments in commercial negotiations.
We often find that families’ broader medium to long-term financial objectives fall into four main categories, and their objectives are often a mixture of the following:
Spend: The amount required to support your lifestyle, with the assumption that this pool of wealth will be spent in your lifetime.
Divide: A set amount of money identified to divide between the next generation and your philanthropic causes.
Preserve: To create a strategy and family culture that enables wealth to last through multiple generations.
Grow: To create a strategy and family culture that enables wealth to grow in perpetuity.
We work closely with families to help flesh out these goals and objectives. Our team are able to present you with detailed simulations that demonstrate how each pool of wealth will grow over time, based on J.P. Morgan’s long-term capital market assumptions. Many families find this part of the exercise extremely valuable as it helps crystalise what can otherwise be a relatively abstract discussion. We find these hard numbers can help families find a clear path towards achieving their objectives.
This dialogue is also extremely important in the context of the investments your team will propose to you. Having ascertained the purpose of your different pools of wealth, they will tailor their proposals to meet those objectives.
Take independent tax and legal advice on your personal affairs before your business sale
It may surprise you to hear that in the whirlwind of a transaction, we often see entrepreneurs fail to take detailed tax and legal advice in relation to their personal affairs before a transaction.
There are some crucial areas to consider:
Review your family’s shareholding in the business to ensure it is held optimally.
Will the transaction alter your family’s exposure to inheritance tax or estate duties?
Consider your longer-term succession plan and family governance arrangements. How does the sale or listing of the business impact your plan?
Review and draft wills and powers of attorney.
Our wealth advisors will partner with you and your tax advisors to ensure you are asking the right questions at the right time. We do not provide tax or legal advice, but support your decision-making by highlighting the potential opportunities and pitfalls you will face as you progress with your transaction.
Prepare for receipt of sale proceeds
The security of your money: Receiving a lump sum of cash can be daunting. Given the significance of the financial crisis in 2007/2008, it is only right that many business owners are particularly interested in identifying a secure organisation to look after the reward for their many years of hard work. For this reason, it is important to identify a well-established institution with a robust balance sheet for the initial deposit of the sale proceeds.
The impact of inflation: It is not uncommon for business owners to want to take a well-earned rest after the completion of their business sale, leaving the proceeds in cash for a period while they consider their options. Taking your time is important. Yet the erosion of that hard-earned capital over time is a key factor to be considered, especially given higher rates of personal inflation for wealthy individuals.
Hedging your currency risk: The proceeds of the sale, the earnout to which you’ve agreed or the escrow account that holds back an element of your reward until a later date – all of these potential options could be denominated in a currency other than your local one and as a result expose you to foreign exchange risk. Hedging this risk can reduce the effect of currency movements and help protect the overall value of the sale proceeds you ultimately receive.
How will the transaction impact you and your family?
We find entrepreneurs approach the sale of their business with a mixture of excitement and trepidation. Many acknowledge that an old way of life may be coming to an end and a new one must be found. They are delighted that they will now be able to embrace the opportunity to travel and get round to those long-delayed activities (learn a language, take up cooking or try a new sport), whilst also feeling nervous about leaving the business they built behind.
Perhaps most importantly, many entrepreneurs are concerned about how the existence of their wealth might impact the next generation. Will they attempt to keep the news from their children – is that even possible? How will they respond to the question: “Are we rich?” Should they? We speak to our clients every day about the best practices we have seen used by other successful entrepreneurs in their own attempts to address these concerns.
The sale of a business is an exciting event that is for many a once-in-a-lifetime experience. Partnering with a team that has helped many business owners to navigate this process successfully brings some clear advantages. Our focus throughout is to ensure that you will have the insight and guidance you need to understand the key issues involved, so you are equipped to act in a timely way and make decisions with confidence. Once you have realised the benefits of your hard work, we can help invest, protect and grow your assets.
Purpose of This Material
This material is for information purposes only, and may inform you of certain products and services offered by J.P. Morgan’s wealth management businesses, part of JPMorgan Chase & Co. (“JPM”). Please read all Important Information.
GENERAL RISKS & CONSIDERATIONS.
Any views, strategies or products discussed in this material may not be appropriate for all individuals and are subject to risks. Investors may get back less than they invested, and past performance is not a reliable indicator of future results. Asset allocation does not guarantee a profit or protect against loss. Nothing in this material should be relied upon in isolation for the purpose of making an investment decision. You are urged to consider carefully whether the services, products, asset classes (e.g. equities, fixed income, alternative investments, commodities, etc.) or strategies discussed are suitable to your needs. You must also consider the objectives, risks, charges, and expenses associated with an investment service, product or strategy prior to making an investment decision. For this and more complete information, including discussion of your goals/situation, contact your J.P. Morgan representative.
Certain information contained in this material is believed to be reliable; however, JPM does not represent or warrant its accuracy, reliability or completeness, or accept any liability for any loss or damage (whether direct or indirect) arising out of the use of all or any part of this material. No representation or warranty should be made with regard to any computations, graphs, tables, diagrams or commentary in this material, which are provided for illustration/reference purposes only. The views, opinions, estimates and strategies expressed in this material constitute our judgment based on current market conditions and are subject to change without notice. JPM assumes no duty to update any information in this material in the event that such information changes. Views, opinions, estimates and strategies expressed herein may differ from those expressed by other areas of JPM, views expressed for other purposes or in other contexts, and this material should not be regarded as a research report. Any projected results and risks are based solely on hypothetical examples cited, and actual results and risks will vary depending on specific circumstances. Forward-looking statements should not be considered as guarantees or predictions of future events.
Nothing in this document shall be construed as giving rise to any duty of care owed to, or advisory relationship with, you or any third party. Nothing in this document shall be regarded as an offer, solicitation, recommendation or advice (whether financial, accounting, legal, tax or other) given by J.P. Morgan and/or its officers or employees, irrespective of whether or not such communication was given at your request. J.P. Morgan and its affiliates and employees do not provide tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transactions.
IMPORTANT INFORMATION ABOUT YOUR INVESTMENTS AND POTENTIAL CONFLICTS OF INTEREST
Conflicts of interest will arise whenever JPMorgan Chase Bank, N.A. or any of its affiliates (together, “J.P. Morgan”) have an actual or perceived economic or other incentive in its management of our clients’ portfolios to act in a way that benefits J.P. Morgan. Conflicts will result, for example (to the extent the following activities are permitted in your account): (1) when J.P. Morgan invests in an investment product, such as a mutual fund, structured product, separately managed account or hedge fund issued or managed by JPMorgan Chase Bank, N.A. or an affiliate, such as J.P. Morgan Investment Management Inc.; (2) when a J.P. Morgan entity obtains services, including trade execution and trade clearing, from an affiliate; (3) when J.P. Morgan receives payment as a result of purchasing an investment product for a client’s account; or (4) when J.P. Morgan receives payment for providing services (including shareholder servicing, recordkeeping or custody) with respect to investment products purchased for a client’s portfolio. Other conflicts will result because of relationships that J.P. Morgan has with other clients or when J.P. Morgan acts for its own account.
Investment strategies are selected from both J.P. Morgan and third-party asset managers and are subject to a review process by our manager research teams. From this pool of strategies, our portfolio construction teams select those strategies we believe fit our asset allocation goals and forward looking views in order to meet the portfolio's investment objective.
As a general matter, we prefer J.P. Morgan managed strategies. We expect the proportion of J.P. Morgan managed strategies will be high (in fact, up to 100 percent) in strategies such as, for example, cash and high-quality fixed income, subject to applicable law and any account-specific considerations.
While our internally managed strategies generally align well with our forward-looking views, and we are familiar with the investment processes as well as the risk and compliance philosophy of the firm, it is important to note that J.P. Morgan receives more overall fees when internally managed strategies are included. We offer the option of choosing to exclude J.P. Morgan managed strategies (other than cash and liquidity products) in certain portfolios.
The Six Circles Funds are U.S.-registered mutual funds managed by J.P. Morgan and sub-advised by third parties. Although considered internally managed strategies, JPMC does not retain a fee for fund management or other fund services.
LEGAL ENTITY, BRAND & REGULATORY INFORMATION
In the United States, bank deposit accounts and related services, such as checking, savings and bank lending, are offered by JPMorgan Chase Bank, N.A. Member FDIC.
JPMorgan Chase Bank, N.A. and its affiliates (collectively "JPMCB") offer investment products, which may include bank managed investment accounts and custody, as part of its trust and fiduciary services. Other investment products and services, such as brokerage and advisory accounts, are offered through J.P. Morgan Securities LLC (“JPMS”), a member of FINRA and SIPC. JPMCB and JPMS are affiliated companies under the common control of JPM. Products not available in all states.
References to “J.P. Morgan” are to JPM, its subsidiaries and affiliates worldwide. “J.P. Morgan Private Bank” is the brand name for the private banking business conducted by JPM. This material is intended for your personal use and should not be circulated to or used by any other person, or duplicated for non-personal use, without our permission. If you have any questions or no longer wish to receive these communications, please contact your J.P. Morgan representative.
© 2019 JPMorgan Chase & Co. All rights reserved.