As our next interview in our Exit Strategy series, we chatted with Erik Fromm, advisor with CSG Capital Partners of Janney Montgomery Scott LLC. As a financial advisor he’s a critical member in the Exit Planning team. We’re excited to have Erik share some of his insights on the exit planning process. The CSG Capital Partners team works with corporate clients advising on their retirement plans and with individuals for general wealth planning purposes, including investment management, retirement planning, business exit strategy, and estate planning/legacy issues. Erik concentrates his efforts on retirement income planning.
Excerpts from Our Interview
J: How do financial planners/wealth managers help within the exit planning process? What the can you do/offer? What pitfalls do you commonly encounter?
E: The biggest item for us is to get an owner to look up from day to day items to objectively determine where the company fits into the retirement picture. They have managed the business for a long time and they have so much financially and emotionally invested that they just can’t picture themselves outside of being the number one person in that business. Most owners think they are going to work forever so they plow everything into the business year after year. They don’t save adequately for retirement and don’t spend the time thinking about what’s next because the business is all they know. In these cases, the owner has to scramble to put together both a transition and a retirement plan, and often both end up being sub-optimal. Working on a plan early not only makes the transition easier but it also prepares for the unexpected – health, a partnership that falls apart, and other things that can easily derail a plan. Our financial planning tools are designed to illustrate the probability of a successful retirement as defined by the client and we can include their business as a part of that illustration. We highlight scenarios where something unexpected happens and action needs to be taken immediately. We share real world examples of how a lack of planning led to a much different retirement than some people are hoping to experience.
J: How does exit strategy planning fit into a business owner’s total financial planning process?
E: A great number of business owners work their whole lives for that one liquidity event, so many times the exit strategy is the most important item in funding a desired lifestyle in retirement and setting up charitable and legacy goals. The exit strategy IS the financial plan. Retirement savings during working years may play a role, but an optimized exit can make all the difference.
J: How often do business owners have an accurate sense of the value of their business?
E: Very rarely – As I said before, day to day operations dominate the focus. Valuation takes time and expertise outside of the core competency of the business owner in most cases. A lot of companies don’t have a full time CFO or someone that understands how manage cash flow and the balance sheet to help the company reach its full valuation. Sometimes the owner is the only ‘shareholder’ so the value that the company has to an outsider doesn’t feel as important prior to an impending exit.
J: How can you work with business owners pre-sale?
E: Set an optimal outcome – will there be an internal transition? – Who will that be and how are they being prepared? Is M&A activity common in the industry? What are other companies doing to maximize value? For us, a lot of time is spent ensuring that the owners are simply preparing for life after work. Making sure a clear retirement savings program is in place is vital to our role as advisor, as well as making sure blind spots are covered in the case of an unexpected event.
J: How early do you suggest an owner starts planning for an exit?
E: We say the red zone is 3-5 years out depending on the complexity of the deal. Getting certain goals in place and making sure those goals are realistic as we start to value the company from a third party’s perspective. More times than not, what’s best for a business owner in regards to drawing an income or for personal tax planning can be drastically different from what makes a company look great from a 3rd party’s perspective. Shifting the way in which you view and structure financials doesn’t happen overnight. That period of having a track record of a shareholder friendly balance sheet or cash flow statement and showing that over a sustained period of time can drastically increase the value of a company at the time of sale. Planning for the unexpected ensures that the continuity and identity of the company can remain intact through any number of scenarios. Certain items such as buy-sell agreements and key man insurance should be addressed early and reviewed often, regardless of an exit timeline.
J: Ideally, who do you see as members of the “Deal team”?
E: We typically see the accountant, an estate planner, our team, and either a CFO for hire type service or a valuation company as the four main pillars of a deal team.
J: What are key points to consider in regards to a person’s financial health and overall estate post sale?
E: With principal wealth tied up in a business pre-sale, business owners are sometimes thrust into a whole new tax bracket and estate situation after a liquidity event. Understanding estate tax implications at the federal and specific state level are critical in drafting an appropriate long term plan. Trust and Estate matters should be addressed to frame exactly how assets will be used for income, specific goals, and legacy planning issues through and beyond retirement. Doing things properly can mean the difference of millions of dollars in the case of asset transfer to future generations – once wealth is created from an exit, the owner, his/her heirs, and the government are typically all going to get a portion of it – careful planning can limit Uncle Sam’s take.
J: So if you had to highlight three main points regarding exit strategy tips to live by for any business owner, what would they be?
E: 1. Understand long term value of the company, 2. Pay yourself first with a qualified retirement savings program, and 3. Work with a team –the value of working with a full ‘deal team’ will far exceed the costs leading up to and beyond an exit, setting you, your family, and the business up for long term success.
About CSG Capital Partners of Janney Montgomery Scott LLC
CSG Capital Partners works closely with individuals, families, corporations and institutions, utilizing strategies tailored to meet their needs and helping them to achieve their financial goals. The team consists of Murray Carter CFP®, AWMA®, AIF®, Geoffrey Goone AWMA®, Erik Fromm, and Chris Rockwell, combining over 40 years of financial services experience. The team manages approximately $450 million in client assets and has been recognized by the National Association of Board Certified Advisory Practices (NABCAP) as a Premier Advisor for four consecutive years.
CSG Capital Partners 1255 23rd Street, NW, Ste 150 Washington, DC 20037 (202) 955-4331 | (888) 222-2316 www.csgcapitalpartners.com
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