What to Advise When Clients Sell Their Business

Alison Steed

1 August 2007

Entrepreneurs typically have a high sense of drive and ambition, a go-getter attitude and an abundance of energy – all of which has helped make them successful. But when people who have worked hard to build up a business, whether from scratch or by taking an existing family business to a new level, decide to sell, it can be hard for them to slow down and enjoy the money, rather than make it. When the time comes to sell a business, there are many emotions involved. The seller him or herself and their family will all face a life change as a result, and this can make the job of those advising those what to do with the money from the sale of a business very complicated. Usually, one of the key aspects for the businessman is to ensure the financial safety and security of his family for the next generation. Private banks such as Royal Bank of Canada and Rothschilds have divisions with staff specifically employed to deal with these issues. In most cases, it is easier for the bank if they have a relationship with the individual before they choose to sell the business, whether as a previous client, or simply so they can advise on the best way to efficiently dispose of the business assets. Mark Evans, head of private banking for the British Isles at Royal Bank of Canada, said: “As a tax and trust business, we come at this from a fiduciary perspective. We are happy to take on businesses where there are no ancillary services. If you look at our peer group, the services on offer are primarily investment led. While we have an investment service, that is not the be all and end all of our business. “We are well positioned to advise people if they are selling a business. For example, we need to find out from the client whether the children are looked after, whether they have got their tax affairs right. Sometimes after selling a business, the best thing to do for about six months is nothing.” Some clients are keen to move their money straight into investments that they feel will give them decent returns in the long run, but Mr Evans advises caution, especially when the most important things are to ensure the family is taken care of, and any personal issues are sorted out. He added: “If I was to sell my business for, say, £5 million, I had three kids and a wife, I would want things set up in a way that I am not paying any unnecessary tax, and that the children are catered for – even if that means they don’t get any money until a certain age. In many cases, it is about building security for the children. “It could be that I have made £5 million and I could live off the interest from that for the rest of my life. Or perhaps you have got a son who is inherently lazy, and if he gets the money now, he may never do another day’s work. It is these issues, the personal issues, that we need to take care of as advisors.” Whenever private bankers are dealing with family finances, it can be like entering a minefield, and having the most in-depth financial knowledge could mean nothing at all if you do not have a working relationship with the client. Dina de Angelo, a director of Rothschild in London, said that while substantial liquidity after the sale of a business can provide “a source of great opportunity”, with it comes “responsibility and challenge”. She added: “Concerns about legacy, raising healthy and motivated children, to managing tax burdens and charitable intentions are all part of the equation and as bankers, our job is to put smart, experienced and dedicated people around a client and their family to make sure all the issues are handled properly and problems are solved with a positive outcome. “At Rothschild, our unique structure has nurtured bankers who are expert at handling clients pre and post liquidity event. Our foundations are built on these types of relationships so we feel well placed to handle all aspects of wealth creation, wealth preservation and growth. We are here to keep clients interests at the forefront of everything we do.” Of course, for many entrepreneurs, the idea of sitting on their hands for six months without making any major decisions about their wealth will be a difficult task. But before deciding what to do with the investments, it is vital to decide on the level of income needed, and whether or not the client will want to make charitable donations from the money that has been raised by the sale. Mr Evans said that by seeing a client before they have decided to sell the business, the process can be made simpler “because there are many tax planning opportunities around that to make sure your affairs are properly organised”. He added: “It would depend on your circumstances, but initially we would make sure you had a team around you to get the best advice – whether it is a tax team or a trust team – and come up with recommendations. I would not be bringing in investment people at such an early stage, I would bring in trust and tax specialists.” As one of the largest global trust companies – with 850 trustees set up in the Channel Islands – RBC has the ability to put in place complex trust structures to help clients. But again, it is all about the relationship. Mr Evans added: “With a trust, you are giving your money to someone else to manage on your behalf, and the deeds last about 100 years. It is about the endgame for generations. “But if you are not on the same wavelength, you are not going to be any good at your job. There is no such thing in this area as a standard solution.” Personal aspects come into play more often than not, and you must be able to trust your private bank contacts with details as sensitive as having “a useless son, an underachieving daughter or divorcing your wife”, said Mr Evans. In a bizarre twist, while many people are very confident about making money through running their business, the process of having money and knowing what to do with it is very alien. Mr Evans added: “If you run a business, then you control virtually everything in that business. You are doing something that you understand intimately. “But let’s say you make your money market gardening, you are suddenly going to be put in front of lots of people that you would not normally come across when you have sold your business. You may be courted by 10 lots of investment bankers, so how do you decide which to choose? To my mind, in that situation, you should see all the banks, because each one will have a different approach. “But you have to look at everything across the piece, and take your time. Investment management is important, but if you get your financial structuring wrong, it can cost you 40 per cent in tax, when you are only making 2-3 per cent above the investment benchmark.”