The Hard Work of Business Transition: The Best Way Out is Always Through
Hi, thank you for tuning into today’s Emerald GEM, which stands for Get Educated in Minutes. I’m Stuart Smith, national director of Business Value Strategies for Wilmington Trust’s Emerald Family Office and Advisory and your host for today’s podcast. In today’s GEM, I’m going to answer the question: How does a business owner successfully navigate the final stages of a business transition?
Transitions are hard. Political transitions, relationship transitions, and especially business transitions.
Long-term financial planning considerations, family legacy concerns, income and estate tax ramifications, transaction structuring, community and workforce impact, legal documentation, along with the reality—and finality—of “letting go” typically make a business transition one of the most difficult things a business owner will ever do.
While the final goal is important, acknowledging and accepting that “hard work matters” is an essential first step. Wise business owners recognize that a successful transition is a journey, not a one-time event.
That wisdom was eloquently—and perhaps surprisingly—taught to me by the life and work of the famous poet Robert Frost. After pursuing his true passion in quiet anonymity for many years, Frost published his first poetry collection at age 39.
Frost’s previous 15 years had been a grind, as he unsuccessfully tried his hand at farming before becoming a high school English teacher. His initial foray into publishing was no sure thing – there’s never been a lot of money in poetry. Fortunately, he achieved critical success and went on to worldwide fame while claiming four Pulitzer Prizes, 31 Nobel Prize nominations, and a Congressional Gold Medal.
Frost’s string of triumphs was preceded by significant struggles, but he kept going – a theme captured perfectly in his 1914 poem, “A Servant to Servants.” In the poem, a New England farmer’s wife reflects on the challenges of an isolated life, unappreciated work, and dim hopes for any positive change before noting that “the best way out is always through.” She knew the value of going forward.
After 30 years of advising business owners, I can confidently say that the farmer’s wife was right. Hard work, perseverance, and facing challenges versus avoiding them are hallmarks of success in any endeavor. Business owners who are serious about optimizing their transitions live out Frost’s sentiment through these important truths:
- Doing Things Right, Doing the Right Things — Understanding a business owner’s attention to detail can be a revealing exercise. Many are quick to crow about their business successes, even as their accounting systems, books and records, and operating procedures are a mess. Cutting corners may boost near-term profits, but it typically diminishes long-term corporate value. This penchant for corner cutting can then compound if an owner seeks a “quick-and-dirty” exit. They are usually in for disappointment – few company sales are quick and avoiding the hard work makes them very dirty. The wiser course: invest time, energy, and funds in the details of day-to-day operations and embrace the fact that an eventual sale process will be a marathon not a sprint.
- Seller Beware — Business owners can unwittingly prove the old maxim “Caveat Emptor” aka “Buyer Beware” in a company sale. It’s rarely about dishonesty. It is about cynically viewing the exit as a zero-sum game and thinking “If someone wins, someone else must lose. I better not lose!!” While both buyer and seller should rightly protect their interests, closing a deal requires a modicum of cooperative openness between the parties. Years ago, a client spurned this way of thinking. Days before closing, he implemented significant raises for key employees without consulting the buyer. The owner’s logic was that he still owned the business. His action ensured that he remained in that capacity. Think of it this way: between getting engaged and finally marrying, a couple starts the give-and-take of shared decisions but, committing to a major life decision without asking your partner can easily end the engagement.
- Necessary Pain — A client recently uttered an age-old refrain. Knee-deep in final due diligence, she expressed surprise and frustration at the sheer volume of data requests coming from the buyer’s accountants, systems experts, insurance professionals, benefits consultants, and industrial psychologists. Transaction veterans may be chuckling right about now, because we know executing a Letter of Intent (“LOI”) is an important milestone, but it’s the first of many on the way to a closed deal. An LOI puts the deal on the five-yard line … with 95 yards to go!! The long march to the end zone is all about enabling a buyer’s comprehensive understanding of the business while satisfying their shareholders and financing sources that there is low risk of post-closing surprises. If those baseline standards aren’t met, there is no deal. My advice: respect the work and remember the Golden Rule – no, not that one … the other one: “He who has the gold makes the rules.”
Maximizing and realizing business value is an arduous trek that can yield tremendous satisfactions for those who stay the course – a premise that Robert Frost would heartily support. As he neared the end of his life, one of his final honors was offering a poem at the inauguration of John F. Kennedy. On that bitter cold Washington day, 86-year-old Frost couldn’t read his intended poem because of the bright sun in his eyes. He carried on and recited a poem from memory. He was prepared and prevailed in a crowning moment. Much like business owners can when they set their minds to following through on all the steps – sometimes through great distractions – in their business journeys.
Early in his administration, Kennedy directed each branch of the US military to expand its unconventional warfare capabilities. The Navy responded by establishing the first SEAL teams. Throughout their storied history, Navy SEALs have epitomized “going through.”
One of their greatest commanders, Admiral William McRaven, gave University of Texas graduates a glimpse into the SEAL ethos during a commencement speech that included 10 life lessons drawn from his long service. Lesson #1 recounted daily inspections to ensure that each candidate had properly made his bed. The young ensign McRaven initially questioned the focus on such a mundane task, but he realized something over the ensuing years that rings true for any owner when they contemplate the full arc of their business journey:
If you can’t do the little things right, you will never do the big things right.
McRaven learned one of Frost’s life lessons. Transitioning business owners could remember the same and not be afraid, as Frost reminds them to take the “road less travelled by …” which can make “all the difference.”
Thanks again for joining us today. Please contact your Wilmington Trust advisor if you have any questions about the hard work of business transition. We would be glad to help you. See you next time!
This podcast is for general information only and is not intended as an offer or solicitation for the sale of any financial product, service, or other professional advice. The information in this podcast has been obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed. The opinions, estimates, and projections expressed are subject to change without notice. Diversification does not ensure a profit or guarantee against a loss. There is no assurance that any investment, financial, or estate planning strategy will be successful. Past performance cannot guarantee future results. Investing involves risk, and you may incur a profit or a loss. Investment products are not insured by the FDIC or any other governmental agency, are not deposits of or other obligations of or guaranteed by Wilmington Trust, M&T Bank, or any other bank or entity, and are subject to risks including a possible loss of the principal amount invested. Wilmington Trust Emerald Family Office & Advisory® is a registered trademark and refers to wealth planning, family office, and advisory services provided by Wilmington Trust, N.A., a member of the M&T family. Wilmington Family Office is a service mark for an offering of family office and advisory services provided by Wilmington Trust, N.A. Wilmington Trust is a registered service mark used in connection with various fiduciary and non-fiduciary services offered by certain subsidiaries of M&T Bank Corporation. Copyright 2024 M&T Bank Corporation and its subsidiaries, all rights reserved.
Equal Housing Lender. Bank NMLS #381076. Member FDIC.