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Largest Transition of Wealth in History

Largest Transition of Wealth in History

Largest Transition of Wealth in History with Andrew J. Sherman

In the next 15 years, 40 trillion dollars of inter-generational wealth will be transferred.

Most of it in small businesses.

Are you ready?

Andrew Sherman talks about succession and transition planning for the coming tsunami of businesses changing owners.

Andrew Sherman serves as a legal and strategic advisor to both leaders of Fortune 500 companies and founders of rapid growth, emerging businesses in the areas of business planning, corporate finance, Mergers and Acquisition (M&A) and intellectual property harvesting, such as franchising and licensing strategies. He is the author of 26 books on business growth, M&A and strategy.  Andrew is an adjunct professor in the MBA program at University of Maryland and at Georgetown Law School for nearly 30 years.

Partner at Syfarth in Washington D.C.

Twitter: @AndrewJSherman

LinkedIn: LinkedIn

Amazon Author Page: Author of 26 books

Listen to the podcast here:

Karla and Andrew Discuss the Coming Transition of Wealth:

Karla Nelson:  And welcome to the People Catalyst Podcast, Andrew Sherman.

Andrew Sherman:  Oh, it’s great to be here. I love the name of the podcast, Karla. I think we’ll be talking a lot about how people are in fact catalysts-

Karla Nelson:  You got it.

Andrew Sherman:  … throughout the interview.

Karla Nelson:  Yep. And you solve problems through people, so it’s really easy to identify the problems and it’s identifying who to go to, right, is critical in business and in life. So share with us, Andrew, kind of a brief overview of your work history. I know you’ve written something like, what, 26 books or something, which is incredible. So how’d you get here?

Andrew Sherman:  Yeah. I’ve got a little bit of a problem. When I see an issue in our society or in business strategy, instead of just drinking a nice bottle of wine, I feel compelled to write a book about it. And so that has become a bit of a career challenge is I’ve got a busy law practice and I teach at Maryland and at Georgetown, but I have written a bunch of books. And what we’ll talk about today probably is how my three most recent books kind of tie together, which I think will be very interesting for your listeners.

Karla Nelson:  Got it. That’s wonderful. Well, actually, can you share even right now just a little bit about those three books, maybe the titles as well?

Andrew Sherman:  Sure. So I’ll give it kind of as an evolution. We all remember about eight to 10 years ago, there seemed to be a real breakdown in corporate governance and leadership and just culture overall. We had companies that were being defrauded. We had boards that were self-dealing. We had acquisitions that were overvalued by $7 billion or $8 billion when it had top Wall Street visors. So I wrote a book called Essays on Governance, and it’s a collection of essays written by both me and others on what is good corporate governance, how does it relate to enterprise value, how does it relate to culture, what’s the role of the board and these things. And like everyone in life, I put a checkbox next to that. But okay, well I’ve cured corporate governance. And then I started noticing, you may have seen or others may have seen my TED Talk, and I just started noticing that I didn’t go far enough, that what was happening is a lot of intangible assets that drive enterprise value were still being wasted and misused and misunderstood.

So of course, I set out to write a book called Harvesting Intangible Assets to cure that societal problem. And then I checked that box and I thought, okay, Karla, I’m good now. I’ve just solved the world’s problems with my two books. And as I dig deeper and deeper into the research, I realized that it was a triangle and I was missing the last point of the triangle and you know this I’m sure in your own practice and in the guests that you’ve had prior to me, is that you can have governance and you can have innovation but if you don’t have culture, it all falls apart.

Karla Nelson:  Oh, absolutely.

Andrew Sherman:  And that’s when I started digging deeper into the Gallup study on the level of disengagement inside companies, both large and small, tech and non-tech, both baby boomer and millennial. I mean, our societal issues around being disengaged and disconnected transcend the workplace. I mean, they’re seeping into our community, into politics, into socioeconomics, into geo politics. We’re becoming extremely intolerant of anyone that doesn’t look or talk or have our cultural backgrounds. And that’s affecting innovation and productivity and profitability in the workplace. It’s affecting enterprise value. And it’s one of the things that led us together on this podcast.

Karla Nelson:  Yes.

Andrew Sherman:  So those three books, in my mind, kind of work together as a strategic triangle that, hopefully, listeners can take away that you’ve got to have all three, you’ve got to have governance, you’ve got to have innovation, and you’ve got to have culture. And if you don’t, don’t expect to raise capital, don’t expect to sell your company for very much money, don’t expect to build the kind of wealth and owning your own company that a lot of people expect to happen with some magic wand.

Karla Nelson:  Yeah, you got it. And I love how you said that the last part of the triangle of the intangible is culture. It’s so critical. And so many times, I think culture is what we do. And so if you have the right governance and you’re keeping in mind innovation, culture can be managed as an output, but it’s still something that has to be measured. And it’s like, well, how do you measure culture? Right? But you have to have that question asked.

Andrew Sherman:  Well, right. And also, you’ve probably seen this as well. You go into companies and you say, “Okay, so tell me about your level of engagement.” And they’ll say stuff like, “Oh, well, we have a ping pong table and we have free donuts on Friday’s.” And I’m thinking…

Karla Nelson:  Oh my gosh, we were separated at birth, Andrew. I’ve literally said, we’ll come in and train your staff and we’ll have a ping pong removal, Just for free.

Andrew Sherman:  Right. I mean, this is many leaders. This is their idea of engagement. I’m thinking, that’s 1994. Why don’t you tell me that while people are playing ping pong, you’re also playing eight-track tapes to entertain them? I mean, I don’t understand it how so many business owners are that classic ostrich, head in the sand, and in a state of strategic denial, if you will, about what the true drivers are of enterprise value. And it’s very sad.

Karla Nelson:  You got it.

Andrew Sherman:  And I tell you this, if you layer one more big component in there, and this was part of our, if anyone doesn’t know this, I’m going to embarrass Karla for a second. She is extremely well-prepared as a podcast host. Some of the best questions I’ve ever been asked to get ready for the podcast. So I hope you don’t mind me embarrassing you live.

Karla Nelson:  Oh no, thank you very much. It was easy because you’re so good on your, your profile is so well put together too.

Andrew Sherman:  Well, thank you. But one of the issues that Karla asked me about to get ready for today’s podcast was around this upcoming era of transfer of wealth. This is a very interesting time. We’re about, according to this study by MassMutual, which keeps getting adjusted every year, there is going to be an intergenerational transfer of wealth of somewhere between $40 trillion and $50 trillion over the next 15 years. That’s right. Trillion dollars. I wish that was coming my way, but it’s not. I’ll be doing more of the transferring than being the transferee. Those $40 trillion to $50 trillion, many of those dollars are embedded in small business and mid-size and family business ownership. They’re not stocks trading in your Schwab account. They are the transfer of business and enterprise value and it’s unclear with millions of businesses who that buyer will be or what they will pay or why they will pay.

And again, business owners are in a fog. I recently wrote a guest column for CNBC where I talked about Ponce de Leon syndrome that I don’t know if anybody remembers that, but Ponce de Leon was the guy that thought if you dip yourself in the fountain, you’ll live forever. And many of us seem to be operating on this presumption that we don’t need to get ready for this process because it’s not going to affect us or we’ll be the ones that live until 90 or with healthcare achievements, we’ll be coming into the office at 85 spry as ever. That’s just not reality, at least not right now.

Karla Nelson:  Absolutely. And in my past history, I worked with mid-market companies to build them up to sell. And obviously, there’s a big part of training in there and what I’ve noticed is that a lot of times, you go into these companies, they’re not planning for any type of transfer. You typically get the call when it’s, okay, I want to sell tomorrow. Can you share a little bit about how critical it is to plan for these and maybe what the best strategies to keep in mind for planning for this transfer of wealth. And really, when you think about it, Andrew, it’s a transfer of wealth and there’s two sides to this, the buyer side and the seller side, right?

Andrew Sherman:  Very much so. I could spend hours on your last question. And number one, many companies don’t even have a succession plan. A succession plan is just what happens if the 66-year-old CEO of the company suddenly drops dead or gets hit by a bus and she’s not prepared to even name her successor or the board hasn’t thought about it. So that is just sort of a crime against humanity to not even think about who your plan B would be if you had a health issue. But on the transition side, the concept I want to get across to your listeners today is around mock due diligence. When you talk about going into companies to get them ready to sell at maximum enterprise value, you’re talking about a process and a timetable having enough of a runway that by the time you’re opening up your kimono to due diligence buyers, you’re really ready for the process. And many times, people like you and I get a call way, way, way too late in the process.

I mean, I literally got a call the other day from a new client, said, “Yep, we’re selling our business. We’d like you to be our lawyer. We’re sending you the signed LOI.” I said, “You’ve got to be kidding me.” I said, “I thought you would tell me something like, ‘Yeah, we think we’re going to sell in 2021 so we wanted to start getting ready now,'” but instead, they just haphazardly pulled it all together, no preparation, no data room, no red flagging of what buyer due diligence issues might be.

I mean, it’s very analogous to our homes. How many people actually wake up in the morning and say, “You know what, I think I’m going to sell my house today,” right? Without repairing it or painting it or getting ready for the process or thinking about what a buyer would find attractive and that wallpaper in your bathroom from 1967 probably needs to be replaced before you sell.

I mean, if we do that in our homes, how come we can’t do it in our businesses? And get the best advisors. And the other piece of what’s going on is in the early ’80s, I came out of law school, I’ve been doing this almost 35 years, and my first transaction, you’ll love this, Karla, was the sale of a small fireplace cleaning company. And the assets of the company were supposed to be $500,000, which was a pretty good size deal back in the early ’80s.

Karla Nelson:  Yeah.

Andrew Sherman:  So I’m there that night working on the final documents and I realized that the assets add up to $475,000, and I start going into a cold sweat. I’m like, “Oh my God, this is fraud. How come we sell $475,000 worth of assets for $500,000?” And I’m literally freaking out as a young lawyer. The next morning, the senior partner comes in and I tell him what’s going on. I said, “We have to change the purchase price or we have to cancel the transaction. We can’t let the client move forward.” And he says, “Oh, just put down $25,000 goodwill.” And I said, “Goodwill? What are you talking about? Like Goodwill Industries where you donate your old sofa?” He said, “No, no, no. It’s an accounting concept. And all it means, customer loyalty and brands.” And I had never even heard of the concept.

So today, right, I mean, today, we have companies like LinkedIn being bought by Microsoft for $26 billion. And what do you think the ratio of tangible to intangible assets are?

Karla Nelson:  Oh, exactly. Because in value, it’s subjective. It’s like, well, okay, well strategically, what are they going to use that data for is a whole different question than a hard asset, right? That you can look at and go, that’s worth X.

Andrew Sherman:  But back in the day, companies were sold and it was inventory equipment, supplies, it was all hard assets. And now, we’re looking at certain transactions. Yesterday, Visa announced they were buying Plaid for $5.2 billion, which basically provides the plumbing for Waymo and other FinTech companies. Of the $5.2 billion in purchase price, how much do you think is allocated to tangible assets versus intangible?

Karla Nelson:  I bet it’s 80/20 at least.

Andrew Sherman:  At least.

Karla Nelson:  At least.

Andrew Sherman:  I mean, I looked at this company online, it’s probably closer to 95/5.

Karla Nelson:  Wow. That’s incredible. Just to think about how much it shifted.

Andrew Sherman:  I mean, 95% of the purchase price being allocated to intangible assets. And so if we’re right that this concept of EBITDA and goodwill are all changing, well then to your point and to your questions to me to get ready for the podcast, we need to focus on the intangible drivers of enterprise value, culture and teamwork and leadership and governance and collaboration and innovation and intrapreneurship and peer recognition and rewards and tolerance for risk. And just all of those things, you can’t fix overnight. It’s not like the wallpaper in your bathroom for 1968. I mean, if you’re truly committed to maximizing enterprise value, you have to start looking at these things now. And say…

Karla Nelson:  Oh. And it’s rolling right into my… you got me, just listen to every word you said. When should you start planning, right? And that’s the biggest key to driving or understanding, as a seller, the asset itself and how you can prove on paper. And that takes time to show, not only shift, and all of those intangibles, you have to have a strategy associated, right, Andrew? So if you could share to the listeners, when’s the best time to start planning and how long should they, you know, take a look at that runway?

Andrew Sherman:  Well, let me give you my standard answer and let me give you a more subjective one. The standard answer is that, that runway’s got to be 12 to 18 months. I mean, it just does. But some of it is customized to the business. So if I’m going through this list of culture, teamwork, leadership, governance, collaboration, and I’m thinking to myself, my company’s in pretty good shape on those things. I need to tweak this and tweak that. But I think we show pretty well on the intangibles. That’s one thing. If, on the other hand, you’re going to be honest enough with yourself to say, you know what? My culture, teamwork, leadership, collaboration, blah, blah, blah, blah, blah, is pretty messed up. And I don’t look too good. When I open up my kimono in the mirror, I’m not liking what I’m seeing and if I don’t like what I’m seeing, heck if a buyer’s going to like what they’re seeing.

And then the answer to your very astute question is, then how long will it take to fix it? Maybe it’s longer than 12 to 18 months, maybe it’s a lot longer. And then, of course, how does that sync up with your own personal plans? People set these artificial milestones of I’m going to sell my business when I’m 62. Okay, great. That sounds like a good age. Probably got that number from your financial planner. But what if 62, if at 62, your business is all messed up? Well, what if 62, markets are all messed up? I mean, right?

Karla Nelson:  The reason why it took longer to get to this point is because that, correct, or, well, the market correction negatively in 2008 because the baby boomers, a group we’re talking about, kind of kicked the can down the road a little bit, right? Because the market shifted and they decided to work a little bit longer.

Andrew Sherman:  Yeah. And it’s pretty easy math. If you were 62 in 2008 and you were waiting for the markets to recover, you’re now 74, 75 and you might still be waiting because some markets have not yet recovered. And how does that affect your financial planning, your life planning, your enterprise value?

Karla Nelson:  Yeah. And I think it was you that wrote an article or shared an article, and we’ll wrap it up with how listeners can get ahold of you after this question, which was also in this huge transfer of wealth. Historically, the owners would often transfer that to the children, right? And then there’s a big shift in the fact that a lot of their children, they don’t want to shift that transfer of leadership and more of a transition plan probably than a succession plan. So can you share with our listeners a little bit about that aspect? Because I think on that side, you can really look as a buyer and strategically take advantage of the shift in this huge amount of wealth as well.

Andrew Sherman:  Yeah. We could do almost another podcast around family business dynamics, but one of the things that I’m seeing is that because many baby boomer age businesses did not have a good succession plan or transition plan, they assume that they’ll just turn the business over to their children. Well, what if your children no longer live in your hometown? What if your children aren’t interested in running the business? What if your children have lives and careers of their own? You don’t want your busy daughter surgeon who went to Stanford University and now lives in Northern California, reluctantly moving back to Kansas City to run your widget business if that’s not what she really wants with her life and your workers are not going to be too pleased either. And yet, that may be the only thing you have in mind if there’s not a third party buyer out there.

And, yes, there’s a lot of private equity dollars piling up, but private equity is not going to buy companies just for the sake of buying them, especially if they don’t see these intangible drivers of enterprise value present because the smart money knows that that’s where all the value lies now is inside intellectual properties and channels and relationships and all the things that are true drivers of enterprise value.

Karla Nelson:  Hmm. That’s awesome. I love it. I can’t wait to check out your latest three books here, Andrew. And so as we wrap this up, number one, thank you so much for your time today. This has been awesome. I love it. I love just positioning of understanding both from a selling aspect and this huge transfer of wealth that’s coming up and it is time to plan now. There never a time that is going to be perfect to have the conversation, right? It’s urgent or not urgent and important, right? This is that conversation that really is about leaving millions of dollars on the table if you don’t have it typically. So, Andrew…

Andrew Sherman:  It really is. It’s been a pleasure to be on the show and I can’t wait for it to be uploaded so I can share it with my social media network.

Karla Nelson:  Excellent. And, Andrew, if you could also let us know, where can we get ahold of you?

Andrew Sherman:  So the best place to find me is in my all day job at Seyfarth Shaw. I’m a partner in the corporate department and head up the local corporate department here in the DC office. I’m at asherman@seyfarth.com, or just check out our website and all my contact information is there. And if you are interested in the books, please take a look at my Amazon author page and all of my books, including the three that we were talking about today, are available.

Karla Nelson:  Excellent, Andrew. Thank you again.

Andrew Sherman:  Oh, my pleasure. Keep up the great work.



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