SEPTEMBER/OCTOBER 2015 OPENERS Research Alert Report on business exit emphasizes planning The Columbia Business School/U.S. Trust white paper found that education on options and early
preparations correlate with owner satisfaction upon completion of the process.
By Barbara Spector
Lawrence Herbert was dining at a restaurant while on vacation in Turkey in 2007 when he received a call from his
attorney. Before leaving for his trip, Herbert had accepted an offer from a private equity company for his company—
Pantone Inc., a Carlstadt, N.J.­based provider of color standards and technology, including the iconic Pantone
Matching System. Although the private equity firm's bid was not as high as a competing offer from a strategic buyer,
Herbert had accepted the lower bid because he felt the private equity firm would be a better fit for Pantone's
management team, which included his children.
Herbert's attorney interrupted his vacation to tell him about an unexpected development: The strategic buyer had
come back with a substantially higher bid.
"I said, 'Well, that's a new one. Let me speak to the kids,' " recalls Herbert, now 86. "And I got them all on the phone
from Turkey, and I told them what was going on, and they said, 'Look, Dad, we'll be OK. Just go for the money, and
we'll be fine.' "
On Aug. 23, 2007, Pantone announced that it had agreed to be acquired for $180 million by the strategic buyer—X­
Rite Inc., a provider of hardware, software and services for measuring, formulating and matching color. Five years
later, X­Rite was itself acquired by Danaher Corp., a publicly traded company with holdings in science and
technology.
Herbert is one of eight business owners whose exit­planning activities were studied in a white paper by Barbara
Roberts, entrepreneur­in­residence at Columbia Business School, and Murray Low, director of entrepreneurship
education at Columbia's Eugene Lang Entrepreneurship Center. The paper, entitled "The Owner's Journey," was
commissioned by U.S. Trust, Bank of America Private Wealth Management. The eight entrepreneurs—five of whom
owned family businesses—shared their stories of selling their enterprises or completing an intrafamily transfer,
including details of the planning process as well as family issues they faced as they prepared to exit.
Common themes
Co­author Roberts says a goal of the study was to provide guidance to baby­boomer business owners who are
beginning to consider retirement. In researching the topic, she says, "I was quite surprised [by] how many people,
particularly in their 50s, had not done too much thinking about exactly what was going to happen to their company."
Roberts compares business founders to artists; both, she says, begin their work with little thought to how much they
could realize from selling their creation. "It's my strong opinion that very few entrepreneurs actually start companies
to get rich," she comments. "Most entrepreneurs start a company because they have a passion about something."
Wealth becomes a priority, however, when business owners shift their focus from building the company to planning
an exit strategy. Yet owners who wait too long to develop an exit plan may jeopardize their ability to maximize
wealth, or their ability to leave the business at a time of their choosing.
A theme that emerged from the business owner interviews, according to Mitchell Drossman, a managing director at
U.S. Trust, was the interviewees' surprise at the length and complexity of the exit planning process. "It wasn't 'set­it­
and­forget­it'; it wasn't a one­time conversation," Drossman notes. "Because it dug deeper than techniques; it got to
the heart of the issue." In addition to dealing with nuts­and­bolts matters such as tax planning and drafting an
agreement of sale, he explains, business owners must answer difficult questions, such as which next­generation
member will be the successor or how proceeds from a sale will be divided.
Herbert understood that it was important to get an early start. In 2004, he and his son, who was Pantone's president,
discussed the possibility of selling the company. "You have to make a decision," Herbert explains. "And the decision
has to come quickly, because, you see, you need a good period of time to set your company up for an acquisition."
Herbert had worked at Pantone since 1956. He bought a stake in the company at age 34 and a year later acquired full
control. Three of his four children had worked at the company; two of them were at Pantone at the time of the sale to
X­Rite.
Prospective buyers generally will want to see several years' worth of certified financial statements, Herbert explains.
In addition, he says, buyers want assurance that a high­level management team and a solid strategic plan are in place.
"When you bring in another company to acquire you, you want to be able to show them that you're a forward­moving
company and you're not at the end of your line," Herbert notes. "You have to show that you're planning for the future.
And you have to do some good marketing analysis to be able to determine what your next moves are going to be with
regard to products."
Roberts says many business owners who sold their companies "told me that the process took much longer than they
had ever envisioned, was much more complicated [and] had much more twists and turns. Some of them told me that
they wished that they had had financial people come in earlier, on a consulting basis, to help them identify the two or
three things they could do that could have added value even further."
Case studies
In addition to Herbert, other business owners interviewed for the white paper include Charles Scheidt, the second­
generation leader of New York­based Roland Foods, which was sold to a private equity firm in 2013; Anita and
Ashok Khubani, who in their early 50s are beginning to transfer ownership of Fairfield, N.J.­based Ontel Products to
their children; Gina Addeo, who succeeded her father as the leader of ADCO Electrical Corp. in Staten Island, N.Y.,
and at age 50 is thinking about her own succession plan; and a pseudonymous fourth­generation CEO of an industrial
services company who navigated some nettlesome family dynamics in the process of succeeding her father.
Roberts says the report demonstrates the importance of open communication among family members. In many of the
cases, she says, "there was an assumption that a child would take over the business," but a succession plan was never
explicitly discussed. "That was a little bit of a surprise to me," she says.
Roberts says she has met business owners who were proactive about their estate planning but failed to explain their
vision of how the company should be run when they were no longer able to lead it. "They'd fairly divide up the shares
[among] all their children and feel that everything was taken care of, forgetting that the governance of the family
business is very critical," Roberts says.
Dividing ownership shares equally among children can cause problems for a business. According to the white paper,
after the death of Gina Addeo's father, she and her sister both owned 37.5% of ADCO; a non­family partner of her
father's owned 25%. The sisters, who were equal owners, had several difficult conversations about how the business
would be managed before finally reaching an agreement.
The white paper's authors emphasize in their report that although estate planning and succession planning are
intertwined, they are two separate issues. A business owner mentioned in the Columbia/U.S. Trust report created an
estate plan that left equivalent assets to each of his children but gave control of the family company to his daughter,
who had succeeded him as CEO. The owner transferred a majority stake in the business to a trust and named his
daughter as beneficiary. A large life insurance policy was put in trust for his son, who had left the business.
When Herbert decided to sell Pantone, he set up GRATs (grantor retained annuity trusts), an estate planning
technique that minimizes tax liability in intergenerational asset transfer. In establishing the GRATs, he provided
equally for his four children, even though his youngest son had never worked in the company. In addition, when the
company was sold, Herbert paid bonuses to the three children who had worked for Pantone. The amount of those
bonuses varied, depending on the value that each child had contributed to the business.
Starting wealth transfer planning early enables business owners to take advantage of tax­saving strategies such as a
GRAT or a sale to a grantor trust. However, Drossman and Roberts point out, if planning does not begin until the
closing of the sale is imminent, it will be too late to move shares of the business into tax­favorable trusts.
Luck and timing
The white paper pointed out that luck and timing can have a major effect on the exit planning process. Both were
involved in the sale of Pantone.
Just as the sale of the company was about to close, X­Rite disclosed that its banker had withdrawn its commitment,
leaving the company without the funds to complete the acquisition. X­Rite requested a six­week extension to obtain
financing; the company did secure a loan—at an interest rate of 12%. The deal closed in October 2007—ahead of the
stock market crash in 2008.
Herbert avoided heavy losses from the crash because at the time he was still educating himself about wealth
management and had not invested heavily in the market. Meanwhile, X­Rite, which traded on the Nasdaq, saw its
stock drop from $14.50 a share to $1.26. Herbert realized that his family could buy Pantone back at a lower price, but
he and his children opted not to pursue an acquisition. Within six years after the sale of Pantone, all of his children
had left the business.
"People say I was very smart. I wasn't smart; I was just lucky that everything I was working on happened to come [to
fruition] at just the right time," Herbert reflects. "You know, you can't always bet on that."
Although a business owner can't count on good luck, beginning to plan well in advance of retirement will minimize
the chance that the owner will have to exit on someone else's terms, the report's authors note. Anita and Ashok
Khubani began speaking with advisers about wealth transfer planning and doing their own research on the topic when
the couple were in their 40s.
Even so, certain elements are outside of one's control, Roberts points out. "Someone could begin a process to sell a
company and find that they're going to have to wait because something happens to the market or the offers that are
coming to them are not the price that they need," she cautions.
U.S. Trust's Drossman says a major message of the white paper is, "Always have your business ready for sale.
Understand what it is that a buyer is looking for, and get a sense of what the value of your business is. At the same
time, even if you're not ready to implement planning, educate yourself on the availability of planning and what
options are out there." 10 fates that can befall a business
Barbara Roberts, entrepreneur­in­residence at Columbia Business School, serves as a board member and consultant to
family­owned and venture­backed private companies and consults to families on succession planning; she also chairs
peer learning groups and runs succession planning workshops.
Roberts believes that television shows like Shark Tank have spread the misconception that growing a company and
selling it for a large amount of money is a common occurrence and easy to accomplish. She says every business
owner should be aware that there are ten things that can happen to a company:
1. IPO.
2. Transfer of ownership to a family member.
3. Transfer of ownership to management team.
4. Transfer of ownership to employees.
5. Transfer of ownership to a partner.
6. Sale to strategic buyer.
7. Sale to financial buyer.
8. Passive owner with an independent CEO.
9. Bankruptcy.
10. Liquidation.
Roberts says her aim in writing "The Owner's Journey" was to raise business owners' awareness of these ten possible
fates. She urges business owners to educate themselves about how to maximize the value of their companies. "There's
a real art to making the numbers work," she says.—B.S.
Copyright 2015 by Family Business Magazine. This article may not be posted online or reproduced in any form,
including photocopy, without permission from the publisher. For reprint information, contact
bwenger@familybusinessmagazine.com.