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Brian Baum of Interchange Capital Partners

Financial Planning > UHNW Client Services

What an RIA Can Do for Retiring Business Owners That an Investment Bank Won't

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The act of planning for and entering retirement is a challenge for any client regardless of their level of wealth and how it is structured, but for the owners of successful closely held businesses, the process of “retiring” can be incredibly complicated — and emotionally fraught.

According to Brian Baum, managing director at Interchange Capital Partners in Pittsburgh, the owners of successful closely held businesses face tremendous challenges once they begin to plan for their life after work and how they will liquidate what can be a very substantial amount of wealth tied up in their company.

Not only are there critical choices to be made about deal structures and tax mitigation strategies, but these successful entrepreneurs must also think deeply about what their day-to-day life will look like post-sale. There are additional concerns to be addressed about the fair treatment of loyal employees and customers, adding yet another layer of complexity.

In Baum’s frank assessment, many business owners simply have no idea where to begin or how to optimally approach the eventual sale of their enterprise. Making matters worse, he suggests, is the fact that many business owners turn to the support of narrowly focused investment bankers who are more concerned about getting deals executed quickly than getting deals done efficiently and effectively.

As Baum told ThinkAdvisor in a recent interview, Interchange Capital Partners was established with this clear, singular purpose: to offer a more holistic and responsive approach to transition planning for closely held businesses.

Baum says the decision in 2020 to break away from the traditional wirehouse model (he and his father left UBS) and establish an independent registered investment advisor has allowed the firm to fulfill this vision to great effect, and he is equal parts excited and optimistic about what is coming next for the organization.

THINKADVISOR: Can you tell me about the decision taken in 2020 to break away from UBS to start an independent RIA? Was business transition planning always your intended focus?

BRIAN BAUM: The story goes back to when I was still in college at Penn State University. I studied psychology and business, and when I graduated, I knew that I wanted to work in the advisory business.

My father was working with UBS at that time, and I joined him in his practice to get my feet under me and start to build my own book of business. With his support, I was able to take a pretty interesting approach to learning about this business and what our clients face.

I was 22 at the time, and I went out and just started calling on people in the Pittsburgh region who I thought were successful and wealthy, and I just asked them to tell me about their story. I told them I wanted to learn from their example and about how they got to where they are today in terms of running these really successful businesses.

I had hundreds of meetings like that over a two- or three-year period, and so I was able to learn so much about what this community of successful business owners was dealing with. And frankly, it was remarkable, because there was just so much continuity in terms of the challenges they were facing when it came to transitioning away from being business owners.

No matter the size of the closely held business or the industry, from $25 million to a couple of billion dollars, nobody had this thing figured out. What’s more, their attorneys and accountants didn’t have this figured out, either.

That was such a beneficial lesson to learn and it really opened up our eyes to this opportunity to create a firm that was laser-focused on this issue. By the time the COVID-19 pandemic came around and caused so much disruption, we saw it as our opportunity to do a reset and go down this path of creating an independent advisory firm.

Can you describe your planning process at a high level?

I would describe our process as being based in three primary phases.

First, there is the longer-term planning that we engage in alongside our business owner clients well in advance of any liquidity event. It’s about ensuring the right enterprise value is being built and helping our clients just win back more of their time so that they can focus on improving their business and enjoying their life.

Next, the planning phase is about everything that happens leading up to and during the transition itself. This is often a more intense phase because there is so much that we can do in advance of a deal to achieve greater tax efficiency and better outcomes overall.

And then, finally, there is everything that happens after the sale from a private wealth and family office perspective. We’ve designed Interchange to be able to help the client and their family across this entire journey.

Where I think we really stand out is in that phase right before, during and after the transition. We’ve developed a better model compared with the traditional investment banking perspective. The difference is that we are not just focusing on the deal itself and the dollars and cents of the deal.

Our approach as an independent RIA allows us to know our clients so much better, and our holistic process allows us to work with the family ahead of the event to get the right ownership structure in place so that the deal, once enacted, will be to everyone’s maximum benefit.

It seems like an important part of the process is getting all the right planning in place well ahead of the actual liquidity event. Is that right?

Definitely. Traditionally, planning professionals like us coming from the private wealth and family office space are often cut out of this process by our clients. They just naturally assume this is an area where they should be served by a big traditional investment bank.

The problem, as I’ve said, is that the investment bankers are only seeing the deal as a singular event, and not a long-term planning process with a before and an after. That can lead to all sorts of issues — for example, negative tax ramifications — that we could have helped them to avoid if we were included throughout the process.

You would be surprised how much can get overlooked in the traditional investment banking framework. A lot of the things we can do to help drive tax efficiency are relatively easy to accomplish in advance of a deal — but only if you know and care about them.

Also, frankly, many investment bankers get paid based on pre-tax dollars. That’s such a critical difference and it has an impact on the outcome, in my opinion.

At Interchange, we are able to talk through every option and opportunity, whether it works or not. The best outcomes are a result of discussing and vetting everything and having a rationale for the route that we take.

What big trends and challenges are affecting Interchange’s clients today? Interest rates? The markets?

It’s really a mixed bag for the client base at the moment.

On the one hand, a lot of clients are pretty secure in their businesses. They have made it out of the COVID-19 lockdown period well, but now we find ourselves in an aggressive credit-tightening environment, which does bring challenges.

We are having a lot of discussions, for example, about the cash conversion cycle in our clients’ businesses. Is cash flow strong enough? Do you have enough cash in the bank to weather a potential slowdown or recession? Are you over-levered?

In a sense, it’s not that complicated. This is a time and an environment when sound business principles will protect you. If you are over-extended or over-leveraged or in a cash flow crunch, that’s really challenging in this environment. You may not be facing bankruptcy, but you can miss out on the real opportunities this environment provides.

Generally, everyone wants a little more liquidity than they have, and everyone is still in a growth-focused mindset, even with the challenges. Our clients know that, in this closely held business space, if you aren’t growing, you might as well start preparing to sell the business. They don’t want to be just treading water.

Beyond that, everyone is really tax-sensitive, and so we are working with our clients to ensure they are being as tax-efficient as possible, and they want to make sure they protect their family’s hard-earned wealth from creditors.

Many business owners, even if they aren’t ready to start transition planning in earnest, they want to buy their time back, so to speak. These clients are paying us to have a handle on a lot of things on their behalf without requiring their hour-by-hour involvement.

Finally, can you talk a little bit about the psychological side of business ownership transition planning? Do some clients have trouble stepping away?

Many clients do, actually. You can imagine why a lot of people in this space would have trouble selling or leaving their businesses. It has been their core purpose in life for so long. They don’t know what they are going to do with the time or the money once they exit.

So, we work with them on this — assuming we are engaged well enough in advance.

We sit them down and talk with them about it. We remind them that, one day, they aren’t going to be running this business and enjoying the process of winning business and talking with customers. We ask them, what do you want to do? We have to get them into that envisioning exercise.

If they say they want to travel, we go deeper. We ask them, where? When? Why? The more you can get them excited about the future after the business, it makes going through the entire transition process so much easier, because the monetary side only goes so far.

Photo: Brian Baum of Interchange Capital Partners


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