Archive for month: June, 2014

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By James S. Cassel

June 15, 2014

I was recently introduced to a successful entrepreneur business owner in his 90s who is considering selling one of his businesses. After our first meeting, his question became one that puzzles many older business owners: “Should I sell my business while I’m still alive or let my family sell it after I’m gone?”

In the weeks following our meeting, he has continued to ponder this question, as he wants to make sure that his decision will be in the best interests of his family and the business.

His financial advisors are encouraging him to wait to sell until after he has passed away. What they are suggesting, which is not a novel concept, seems to make perfect financial and tax sense on paper. Their recommendation is based on the assumption that by waiting to sell after his death, his estate can enjoy significant tax benefits from a “step-up in basis” (a readjustment of the value of an asset when it is inherited).

In simple terms, here’s how this generally works: Let’s assume you own a $50 million business and your tax basis in it is $5 million. If you sell the business during your life for $50 million, you will pay capital gains tax on $45 million; after you pass away, your family will pay an estate tax on the net remaining monies.

However, if the business is sold after your death for $50 million, the basis is recalculated. Your heirs would pay the estate tax on the $50 million but wouldn’t owe any capital gains taxes. The logic here is that you are mathematically better off retaining your business and having it sold after your death to greatly reduce the amount of taxes due.

Here are some of the flaws in that line of thinking: His advisors are neglecting to take into consideration the fact that the value of the business might drop after the owner — who has been the heart and soul of the business for decades — is no longer part of the business’ daily operations. Indeed, business valuations tend to suffer after the individuals who were the primary business drivers die.

Moreover, the course of action recommended by his advisors would put the burden of selling the business on his wife and brother in his 80s, who might not be the best-qualified person to handle the process under the emotional duress that is likely to follow his death.

This business owner should consider other key issues, such as the effects of his passing on the employees, customers, lenders, management and suppliers, to name a few. For example, if customers become concerned about the future operation and stability of the business and decide to explore other suppliers, this decrease in business could adversely affect the business’s value. Even with ample preparation, this business owner would have very little control over how his death will affect the valuation, or how a divestiture would affect his family as well as the business.

What did this gentleman decide to do? The jury is still out, as he is still evaluating the options. One of the reasons he probably likes the suggestion of his advisors is that it would enable him to continue working in a business that has been part of his persona for more than 50 years. Like other business owners in his position, he might feel sentimentally attached to his business. The danger in sentimental attachment is that decisions are often made for emotional reasons and not based on what may be in the best interest of the company and its stakeholders.

Based on my experience helping business owners navigate these complex issues, I am confident that he and his family will be better off if he sold the business while he is still alive. During our meeting, I explained to him that there are a wide variety of alternatives to selling outright at this time, if he wishes to continue working at his business as long as possible. Finding a partner to whom he can sell part of the business now and then sell the remainder after he has died could make sense under the right circumstances for the business and his family.

Although finding an appropriate partner can be a challenge that requires help from qualified advisors, it can be well worth it in the long run. For example, this approach could ease some of his business tax burdens and create a clearer succession path for the business. The best alternative might, in fact, be to sell the business to a strategic buyer who might pay the maximum amount and put in place an employment agreement if the owner wants to remain involved.

Without a doubt, letting go of a business that you have owned and nurtured for years is no easy task. When it comes to finding the right time to sell, there are no cookie-cutter approaches or crystal balls. It is crucial to consult with qualified advisors, including investment bankers, who can provide the necessary strategic counsel and perspectives to help protect your best interest.

James Cassel is co-founder and chairman of Cassel Salpeter & Co., LLC, an investment-banking firm with headquarters in Miami that works with middle-market companies. He can be reached at jcassel@casselsalpeter.com and www.casselsalpeter.com

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Money: Deals dip in Florida amid squabbles over price

By Brian Bandell

May 30, 2014

The number of private equity firm investments in Florida-based companies declined in 2013 as haggling over pricing made finalizing deals difficult.

Miami-based investment banking firm Cassel, Salpeter & Co. analyzed private equity activity in Florida using data from Pitchbook. There were 135 private equity investments in local companies in 2013, down from 146 in 2012. That’s still better than the 113 deals during the 2009 financial crisis.

During the Great Recession, many of the private equity investments in Florida were in struggling firms at discounted prices, but now companies are doing better, said James Cassel, chairman of Cassel, Salpeter & Co.

“There’s somewhat of a disconnect on value between sellers and buyers,” he said. “There is so much competition for deals and, in some cases, they aren’t willing to pay the prices others are willing to pay.”

In order to justify purchasing a company for well above its book value, a private equity firm must know it could get a strong return down the road, Cassel said. With interest rates likely to rise, that means adjustable-rate loans tied to company acquisitions should be paid off as soon as possible – otherwise they’ll become more expensive, Cassel said.

Companies in the IT and health care industries have been acquired for strong multiples of their book value, he added.

Lately, Cassel’s firm has been busy working for Florida companies looking to sell. Meanwhile, he found the number of Florida-based private equity firms has grown from 26 in 2010 to 33 in 2013.