Reinvestment and Reinvention: Life after the Sale of the Family Business
By Stephen G. Salley, Esq, Senior Partner

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Bond traders have a name for it…reinvestment risk, and it becomes personal at that seemingly joyful moment when good news—such as the maturity of a great bond—results in a big maturity check after years of excellent interest production. This happy satisfaction, however, quickly becomes a darker reality when you realize that there is simply no place in the current market to buy a bond of quality and yield anywhere close to the one you just cashed in. Your money has mysteriously lost its clout. And while there is no shortage of experts to explain the complex phenomena behind declining interest rates, increasing default exposures, or sheer global political volatility as a damper on your money's earning power, it still feels wrong. Now apply that scenario to your position as a family business owner after a liquidity event. The glorious moment has arrived when a buyer assumes the position of risk, reward, and significance in an industry you know and love. Just like the bond holder, you receive a big check. First comes the moment of exhilaration, quickly followed by the cold reality of "now what?"

After the sale is certainly not the time to answer the "now what" question, nor is it the moment when you sign with an investment banker to market the business. Rather, the time to figure out "now what" is when you have the first inkling that the sale, in whole or even in part, is a possibility . . . in many cases, that time is today. The sale of an asset that holds such a central and complex role within a family as a family business is not simple, nor is it without multiple layers of emotional and motivational issues that simply don't exist in the sale of less identity-related assets. It is reinvestment risk writ large.

Your professional family advisers are certainly more than capable of addressing the technical and daunting issues surrounding the externalities of the sale: taxation, valuation, retained liabilities, continuing employment terms, and so on. It is, however, the interrelationship between those technical (and crucial) issues and the "internalities"("now what?"), that deserve more attention than they often receive. All involved—you, your family, and the business—will need to be reinvented after the sale, and the time to address the complexities of this is, quite simply, as far in advance as possible. Clearly the business, its balance sheet and its operations, will be "cleaned up" before a buyer appears. All too often, unfortunately, the same is not true for the key constituencies who are defined by the business. . . the owners, managers, and key employees.

One way to approach structuring a plan for both the sale and the "reinvestment risk" it implies is to create a "Reinvention Plan." By independently addressing three key considerations (discussed in the following sections) and integrating the conclusions into an analysis, you can create an organic (and often unpredictable) overview of why the sale is being considered and the potential implications for you, your family, and the business.

Considerations for Your Reinvention Plan

"What will my/our relationship with the business be after the sale?

There is a frequent misunderstanding that "selling" the family business constitutes a clean break. This is seldom the reality. If the sale is only a portion of the equity, the continuing relationship is self-evident; of equal significance, however, are the less-visible ties to the business after the sale—employment of family members, economic participation through an "earn-out," representations that constitute continuing liabilities, acting as a creditor for self-financing, and much more. Long before the sale comes to fruition, the family has to resolve the ambiguities these strings entail, including the role reversal of owner to employee, the pain of losing control, the certainty that decisions will be made differently, and the impact on long-time employees and business relationships that may arise in unpredictable ways. While only the most creative mind can conjure up the realities of this part of the ownership's forced "reinvention," conversations with professionals and others who have been through similar experiences can be of enormous help. It is at this point that the family owners can and should identify the "non-negotiables" and build these into the planning from here on out.

What might constitute a "non-negotiable"? It could be job security for key employees ("They are like family to us") or an unwillingness to put the family at economic risk after a shift of control ("I can't guarantee future sales when I am not guiding the process"). Non-negotiables may also be far more personal, such as ensuring that the business' name and quality or participation in industry groups or community activities will be maintained. In short, some non-negotiables go to the very values and legacy as well as the identity of the patriarch and the family. Early identification of and preparation for the implementation of non-negotiables is the first key to successful reinvention.

Estate and Tax Planning: Unintended Consequences

It goes without saying that there are few moments in a family's economic life that have greater impact than the sale of the family business. Proper planning may (should?) have anticipated the sale by years, or even decades. The legal ownership of the business may be a complex maze of trusts, family partnerships, or shared ownership with descendants, all the products of sound tax and estate planning. The good news is that the fruit of tax and estate planning is picked at the moment of sale, as value is shifted between generations in great gulps with minimal transfer tax or concern. Too often, though, the consequences of great planning catch the family unaware—cash is a very different asset to manage than a minority interest in the family business. The individuals, trustees, and general partners suddenly have to reinvent themselves, often from passive to active management. Of greater possible concern is that the increased liquidity will alter the relationship between fiduciaries and beneficiaries, between siblings, and even between parents and children, often in unpredictable ways. Foresight in family preparation and training assumes huge significance overnight. Reinvention is crucial, but preparation for reinvention starts decades earlier.