Selling a business entails so many elements, including the emotional aspects of letting go of something you have worked so hard for. Andrew Kelleher, the Co-Founder of the Kelleher & Buckley, LLC, joins Domenic Rinaldi to share his extensive experience regarding M&A transactions and estate planning. Andrew talks about the preparations you need to do when selling your business. He also emphasizes the need for the right financial and insurance advisors that can help you get through the process.

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Andrew Kelleher: Preparing To Sell Your Business

We are in for some great insights in this episode. Andy Kelleher, Cofounder of the Kelleher & Buckley law firm, is here to share his extensive experience regarding M&A transactions and estate planning thoughts for business owners. He concentrates his practice in trust and estate law, business law, and asset protection planning for high-net-worth business owners. Being both an attorney and a CPA, he has earned the respect and trust of both clients and peers alike by never prescribing advice that he wouldn’t take himself. I’ve known Andy for a number of years. We’ve had the opportunity to work on a few deals together and I can say without reservation that Kelleher & Buckley is a top-tier law firm. Andy, I’m excited you could finally find an opening in your busy schedule. Welcome.

Thanks, Domenic. I appreciate it.

Andy, why don’t we start with a little bit of background on yourself and the firm. Let everybody know who you are and what you do.

My name is Andrew Kelleher. I’m with Kelleher & Buckley, LLC. My concentration is working with business owners in their estate planning, tax planning, and asset protection. The firm is located primarily in North Barrington, Illinois, but we have offices down in Chicago and in Naples, Florida.

You along with your partner, David Buckley, founded this many years ago. You’ve grown the firm tremendously, at least since I’ve known you. It’s amazing to see the growth that you’ve had.

It’s been a lot of fun. We started the firm in 1997. My partner, Dave, and I have had a lot of fun growing the firm. We’re approximately 55 people now and 27 attorneys. It’s been a lot of fun. The primary focuses of our practice would be we have a corporate practice group that does all things corporate. We have an estate planning group that does all things, estate planning and trust administration, probates and the like. We have the litigation practice group that backs up both the corporate practice group and the estate planning group. Unfortunately, litigation does arise from time to time with people and we have the ability to handle that, which is a valuable thing to have that litigation practice group to back up the corporate attorneys and the estate planning attorneys. When you’re negotiating a deal or negotiating with the beneficiary if you’re representing a trustee or vice versa, it’s good for the other people out there to know that if push comes to shove that you have the resources to handle that.

 

It also gives you the ability to get ahead of the curve. If something gets to litigation, those guys can advise the other sides on how to keep themselves out of that, to begin with.

One of the themes that we’re constantly professing here is an ounce of prevention is worth five pounds of cure when you talk about staying out of litigation. Having a great litigator who’s great in court, backed up by wonderful technicians that we have at the corporate practice group and the estate planning group, that’s a powerful combo.

Congratulations on all the growth. You have had some explosive growth and doing some great things. I’ve had an opportunity to work with you a number of times. Your firm is awesome. Andy, sticking with the M&A theme, I know you work with a lot of business owners as they’re starting to think about succession planning, the next stages, whether that’s going to be selling the whole business or passing it down to the next generation or maybe key employees. If you could talk about in that pre-planning stage, what are some of the issues that come up from a legal perspective that you wind up dealing with business owners that are contemplating that next step?

When people are planning to sell their business, the starting point that we begin with is the end of the cycle, which would mean the business owner has sold their business. They’re sitting there with assets such as cash, maybe stock in the buyer, or some type of promissory note or other consideration. We say, “What does life look like for that owner post-sale?” What would we want that picture to look like both financially and from a legal structuring perspective? Usually, we would say on the family’s personal estate planning perspective, post-sale. We begin with the end.

You have to envision what you want next. We always find that when people can’t tell us what they want in the end, they may not quite be ready. We challenge them as to whether or not this step is the right step.

If you start with what does the post-sale life looks like for the business owner and the business owner’s family, then you start getting into the fundamentals of starting the planning process of selling the business should start a few years at least before the owner sells. When we go into the business and start speaking with the business owner, you start seeing a lot of issues that we see all the time, Domenic, such as client concentration, supplier concentration. Maybe some employees that need to be realigned, maybe the owner themselves, that we see a lot, hasn’t delegated enough in the organization and has retained too much control. We run into that all the time. That could hurt the owner’s value on sale.

If we have a little bit of lead time, we work with wonderful organizations such as yours and other advisors that we can bring to the table to work on how we can create that value ahead of time for that owner. In that process, how do we get the legal structuring in place at the estate planning level, reorganizing how the equity is valued, how the equity is placed among various entities, and trusts? Set up that value growth in the right trusts and LLCs, so at the time of sale, we’re ready to roll. Once it’s sold that post-sale, everything is preset.

Andy, imagine if somebody is a client of yours, you’re talking to them about these issues well in advance and hopefully, they’re following your advice and taking the proper steps from an estate planning perspective. Let’s say you get introduced to a new client that has come to you and said, “I’m contemplating a sale.” What issues do you see that most of those prospective clients have in regards to their estates and their estate planning as it relates specifically to going down the path to selling their businesses?

Domenic, what we see with a lot of business owners is a lack of coordination between the business level and the personal level of estate planning. For example, at the business level, what we see as lawyers are sometimes the people that are closest to us are the people that are going to cause the business owner the most problems. We want to avoid problems and get things smooth out before we’d ever go to sale. For example, making sure that the relationships with the partners or other members or fellow shareholders are good. Making sure that legal documentation such as buy-sell agreements and the proper life insurance is in place is important.

Making sure that those business owners are communicating with each other in a formalized manner. For example, the old school method of sitting down with all the shareholders and having a meeting where minutes are taken is important all the time. In those preparation years before the sale, it’s important to make sure that all the business owners are on the same page to avoid any problems and manage expectations correctly. That keeps the peace during the time before they would sell and helps avoid any pitfalls with the people closest to each other before the sale.

The other topic that we see is making sure that things are lined up with employees, especially key employees. Sometimes those people are invaluable to the ongoing business while people are contemplating a sale. At the time of sale too, making sure that those people are well taken care of, are going to be staying with the business if they’re critical to the business and making sure all the legal documentation is in place to facilitate that.

These are some of the issues that when people come to us and haven’t done the proper planning, they have to scramble to right the ship and do some things hastily or they don’t even do them and then they have to deal with these things after the fact, which as you know is painful. Can we dive into buy-sell agreements a little bit in life insurance? Let’s talk about how you help people internally get comfortable with buy-sell agreements and is there a lot of education, I would imagine, that’s involved in that?

It’s amazing to most lawyers and to me, how many people have a business with a partner or fellow shareholders and they don’t have a buy-sell agreement. What does that mean? Fundamentally, a buy-sell agreement, what a lot of people would look at is that if you and I were partners, Domenic, I couldn’t sell to somebody else. You would always either have a right of first refusal, if I was voluntarily going to sell that to somebody or if something bad happened to me in my life that was involuntary like I became mentally disabled or passed away. You would also either have a mandatory obligation to buy out me or you’d have right of first refusal.

It’s amazing to me how many people haven’t thought about that. In the cases that we’ve handled, when there’s not a buy-sell agreement back to the theme of an ounce of prevention is worth five pounds of cure. What happens is like in my example, I become mentally disabled, the worst situation. I’m still there. I still have needs as a person. I’m not producing any value or income for our company, but yet I still basically have legal rights to distributions. Unfortunately, I’m not disparaging my wife at all, however, but the idea would be in many cases, you would be dealing with my wife or that person’s spouse in negotiating those types of things. That person has no context or corporate memory as far as what’s gone on between us as fellow business owners in my example.

When planning to sell a business, the starting point is the end of the cycle. Click To Tweet

That leads to a lot of problems. They bring in other professionals or doing the best they can such as lawyers and accountants to deal with the issues that could have been easily addressed such as valuation. There can be a lot of interpretations of valuation and that leads to a lot of disagreements. In addition to valuation, how is the company going to pay that person? Does the company have to pay that person? The issues can get complex. It’s simple. The concept is if people do put together a buy-sell agreement and a shareholder’s agreement saying, “Answering these questions ahead of time, if something bad happens to one of the shareholders or partners, how is the business going to be valued?” That’s a big deal.

Once it’s valued, how is the person who’s departing or their estate, how is that value going to be transmitted to that person? Are there going to be promissory notes set up? Is there going to be a cash payment? Many times, life insurance is the best way of handling that in a death situation because you have a lump sum of money that can pay the departed person right away or their estate. The buy-sell agreement answers those questions ahead of time. If there are less questions, there’s less chance for controversy and disagreement can lead to elongated litigation and a lot of bad feelings.

I’ve got a client. There are three partners and no buy-sell agreement. Two of the partners want to sell and the third does not. They don’t even have anything in their shareholder agreements that allow for the majority to force the sale or anything. They’re in limbo and can’t do anything and they’re stuck. That third partner doesn’t want new partners. They are in a bad way. The time to contemplate this is upon formation. In your opinion, why don’t people do this more often when they form the corporation? Is it they don’t think about it or they don’t get proper counsel? What’s your experience there?

My experience is there has been one of two things. It’s either they don’t get the proper counsel and because they’re starting a business, it’s pre-revenue in many cases. People put in their contributions of equity at the beginning of the business, especially if it’s a pre-revenue business. They have to watch those dollars closely. Everybody is excited and it’s all-new. People aren’t thinking or valuing what happens if somebody passes away or becomes disabled or somebody wants to leave. They don’t think of the bad side of things. They’re in the romance stage of the business process. I would say that’s most of the time that we would see that. Sometimes the people either don’t want to pay for it or they’re not seeking counsel but usually, it’s because they don’t want to pay for it. They’re in the romance stage. They’re not looking long-term.

Andy, in your opinion, I would imagine that buy-sell agreements are living breathing documents. Let me ask two questions. One, I assume you would recommend that people revisit these on a regular basis. Two, when they do revisit, what are some of the challenges in getting partners to sit down and revisit those documents? I imagine this is somewhat of an emotional issue. It’s almost, you don’t want to say negotiation, but in essence, it could be a negotiation. What are some of the emotional things that come into play when you’re looking at these buy-sell agreements and revisiting them?

In my experience, it comes down to people’s personal lives. Sometimes you’ll have one partner or shareholder who saves their money, and another partner or shareholder who spends everything they earned. One partner over the course of years of running the businesses has a nice nest egg built up and maybe the other partner doesn’t and they’re relying on that value of that business to take care of his or her family upon passing using death as an example.

When they go and revisit these documents, which is sometimes hard to get shareholders or partners to do in the first place. That’s one of the scourges that we have, especially in the Chicago land market, is that people tend to put these documents in place and don’t look at them for twenty years. To your question, if we can get people to the table and talk about adjusting the document and amending it, that’s a big win. When they get there, those dynamics of what’s going on in their personal lives is a big deal. Maybe one person is a little bit older and wants to retire quicker. One person is a little richer as far as he has that nest egg. That all affects what their goals are and whether or not they want to adjust that price or adjust the terms of what’s been set. It could lead to some problems.

 

I could see that. One partner may be contributing more at least from their perspective than another partner. You’ve got equality issue that probably comes into play sometimes in some of these. You bring up a key point for the M&A Unplugged Community that you do these documents. You put them away. It used to be in a file drawer, but now you put them in a drive somewhere electronically and you forget about them but the business is a living, breathing entity. It changes, evolves, and so do the owners. It’s important to seek counsel from like yours on a regular basis to make sure everything is copacetic and the way that the parties intend them to be.

There’s a larger theme and it is having a proactive attorney. There are a lot of attorneys and other professionals that are more reactive like what the client has to come to them before something is talked about or thought of or communicated. One of the things that we pride ourselves on, especially in the corporate practice group and the estate planning groups, is that we tend to have a proactive mentality. The analogy that I used for a lot of people is the sheepdog analogy. We’re trying to protect the business and we’re trying to protect the family’s estate and many times, the business is the largest asset. The idea is that we do see a tremendous amount of people due to custom and due to how things are in the normal course of business, over the course of the last many years, get the agreement done and in place, think that everything’s okay and revisit it every twenty-year mentality causes a lot of problems.

I talked about earlier in the conversation, it’s the people closest to us, like our fellow shareholders and our fellow members or partners that many times can be our worst enemy. Being proactive and making sure that these agreements or the expectations are being consistently set is something that a lot of professionals including lawyers should be working towards changing that culture towards being more proactive. In my experience, if you don’t have the corporate structuring done right or maybe the real estate separated from the business is an example. You don’t have maybe certain asset or asset protection or liability exposing the type of assets separated from other components of the business, one will say, “If a wolf ever gets into the pen, that wolf can do a lot of damage to the sheep.”

People need to value the proactivity of the sheepdog, going around the pen, and make sure that the herd is protected inside that pen. That’s something that we see a lot of. A lot of business owners think they’re okay and they’re not okay. They don’t value the proactive lawyering, which is something that we pride ourselves on. Once our clients see it, we explain it and we go into the details of why do we do this. If the client sees it and once they value it, they pay for it. They see the value of it especially the people that had a bad occurrence in the past.

You’re bringing up some great points. As you stated, businesses typically, if not an owner’s largest assets, it’s certainly usually is in the top three. Our analogy from in the intermediary world is the stats are over 75% of owners fail to prepare for their exit. When you think about that, it’s staggering. The largest asset or near the largest asset, and you’re not taking the steps to protect it and prepare it to maximize the value is mind-boggling at times. It’s a massive opportunity for firms like yours who are proactive, so that’s kudos to you.

Part of that proactivity is not lawyering. It’s bringing in know great organizations such as yours or bringing in other advisors. Even to the point where we have psychologists that we’ll bring in to prepare the people. We’ll bring in valuation people way ahead of time and to ask those questions like what particular components of the business or issues need to be resolved to create that value. It’s a proactive approach and it’s also a collaborative approach that can put that person in the best position post-sale, which is with a lot of these businesses, their family businesses, it is the largest asset for that family. At the end of the day, after that asset or business is sold, we have to make sure that the family’s okay.

You touched a little bit on life insurance. I’m wondering if we can spend a few more minutes on that because this is an area that people completely skip. I can’t tell you how many times. It maybe 9 out of 10 where people are not even thinking about life insurance as an asset protection strategy. Can you talk a little bit about that and how you help your clients deploy the right insurance strategies?

From the lawyering perspective, this is where the bridging of the business level planning and estate planning is very important. Life insurance is a key ingredient in proper planning. For example, at the business level, life insurance is a wonderful tool to be incorporated with the buy-sell agreement or shareholder agreements that if one of the shareholders or partners passes away, that there’s cash instantly available. It’s usually income tax-free. That instantly available pool of cash can pay the departing shareholder their estate or trust, and can provide for a clean break between the shareholders who will continue with the business and the family of the deceased shareholder.

If we can make that break clean and not have connectivity there, many times that’s the better result for the ongoing business and in that family or remaining shareholders in the family of the departed or deceased shareholder. It’s nice and clean. That keeps the business alive and active, especially if there are multiple families involved or various family members inside of a single-family involved. If that’s coordinated correctly with the bridging of the business planning to the personal level estate planning, life insurance can play an incredible role in addressing estate taxes.

In Illinois, under current law, if a deceased has assets worth more than $4 million, which would include their interest in the business and pretty much every other asset that the person would own, there’s a tax that we do in Illinois. For the federal government, the exemptions are much higher. It’s $11.4 million for 2019. Life insurance is a wonderful tool to use to pay off estate taxes. One of the key ingredients to this is that life insurance can be designed to be totally tax-free for estate tax purposes and income tax purposes by using proper trust planning. When you look at how the taxes are calculated, one simple but powerful idea is you want to pay the estate taxes with assets that are not included in the estate computation or the calculation. You want to use tax exclusive assets to pay the estate tax. An irrevocable life insurance trust planning combined with life insurance can save empires if it’s done correctly.

Being proactive and making sure that agreements are being consistently set are something professionals should work on. Click To Tweet

Andy, that sounds like a podcast in and of itself. That is a meaty morsel right there that deserves some serious unpacking. From a life insurance perspective, the business is buying the life insurance but the beneficiary in this tax-deferred strategy that you’re talking about, the beneficiary is a trust that would then be responsible for paying off the estate planning tax liabilities. Did I get that right?

Yes and no. Most of the time, we like to keep it separate. The idea is that the buy-sell would be funded by separate policies between the shareholders and the fellow members. As far as the death taxes, life insurance that many times would be funded with a separate policy. Many times, not all the time, but the life insurance policies that are used to pay the debt taxes at the personal level is a policy that would be ensuring both the shareholder and their spouse, which they call a joint survivor or second-to-die policy. Where the policies that you would use in most cases amongst the shareholders or the members at the business level would be policies on those specific individuals and not their spouses. Most of the time, that’s what we would see. That keeps it nice and simple and private.

This is such an important topic that is overlooked so often by business owners. I’m glad we got to touch on this. We may seriously want to think about a follow-up to this because I imagine there are lots of additional information that people in the M&A Unplugged Community would love to hear to deploy in their own businesses.

We’re passionate about it because life insurance is one thing over time. If you take a look at the financial planning community and other communities, life insurance is a tool that’s underutilized. It’s something that’s necessary. It preserves an enormous amount of value. If you can set up that irrevocable life insurance trust, put in a life insurance policy that’s going to be permanent and will be there. The certainty that’s provided by that tax-exclusive, estate tax-free, income tax-free pool of cash to pay off the government and keep that business thriving is a wonderful tool that’s certain.

We’re about to wrap up here, but I don’t want to leave the interview without asking you about M&A, Mergers and Acquisitions activity. Your firm is active in representing buyers, sellers in mergers, and acquisitions. I like to hear from your perspective, what you are seeing in the market. Are you picking up on any new trends that are occurring or evolving things that you think would be important to communicate?

To be candid with you, the diversity of the type of businesses that we’re seeing and being sold and bought, I would say at this point in time, based on the activity that we have at Kelleher & Buckley, it seems like the M&A marketplace is still alive and well. The economy must be doing pretty well. I’ve heard of some retractions may be coming in the logistics and trucking industry. It’s been going down a little bit in certain segments. Overall, we are seeing a lot of activity. I know we’ve done probably 75-plus deals or more.

 

We’re seeing the same thing. There’s been no slow down at all. The diversity of deals across all sectors has been pretty strong.

It’s a great market now. There’s access to capital. There seems to be a lot of faith that things are going to be better in the future. There are people that want to buy and they have the ability to buy. We see a lot of people who have been sitting on their businesses for a long time and they’re there waiting for the right price like everybody else. We hope that they don’t make the same mistake that they made back in 2008 when they waited too long and the Great Recession hit and they got stuck in their business for the next eleven years. A lot of people remember that. I still think that it’s a big factor towards people wanting to go out there and sell especially with the free flow of capital, the desire to make money, and having faith in the future.

Andy, it’s been such a pleasure having you on. The insights you shared were tremendous. If people wanted to get in touch with you, how could they reach you?

The best way to reach me is on my cell phone at (847) 682-5367. That’s my business cell phone number.

Andy, thank you. I appreciate you being here.

It’s my pleasure, Domenic.

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M&A Unplugged Community, let me summarize a few of the key points and takeaways from my discussion with Andy Kelleher. First off, you heard him talk about starting with the end in mind. If you’re an owner of a business and you are contemplating the potential sale of your business, figure out where your end game is first and work your way back. Do it both from a financial, personal, business, and estate planning perspective. Once you have that clear picture, bring in the right advisors to help you work your way back to figure out what you need to do to achieve that.

The next big point that Andy talked about was making sure that you have all of your business-level documents and issues in line and good order so that when it comes time to do all of your estate planning and documents, that stuff will easily flow over. For example, we talked about buy-sell agreements and how important that is. Get them done early, revisit them regularly. Life insurance can preserve the value of the business and maybe even the entity itself. It’s critical to consider that. Things that seem little, but they’re not like keeping up your minute books and all of your other organizational documents.

Life insurance can be designed to be totally tax-free for estate tax and income tax purposes. Click To Tweet

The last thing was having a collaborative approach. You heard Andy talk about how his firm brings in specific advisors depending on his clients’ needs and issues. Assembling a good team of advisors is critical and especially as you march down the path to doing a merger and acquisition, having M&A-specific professionals who can advise you. I hope you enjoyed this episode. If you would like to learn more about the process of acquiring or selling a business, please visit our website at SunAcquisitions.com or feel free to reach out to me at [email protected]. I look forward to seeing you again on the next episode of the M&A Unplugged show. Until then, please remember that scaling, acquiring or selling a business takes time, preparation, and proper knowledge.

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• Kelleher & Buckley
• [email protected]

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