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by Dale Gillmore  We talk a lot about succession planning and with good reason: Most business owners are woefully unprepared for it. Part of that unpreparedness comes from focusing only on the mechanics of the deal -- the valuations, the tax loopholes, etc. -- and not enough time on the preparedness of the succession team to lead the company into the future.
I recently discussed eventual transition plans with a client who owns a small but highly profitable manufacturing business. He started the company on his own, ran it for 40 years, and plans to retire in the next ten years. Several years ago, his son entered the business and has since flourished in the company. He’s moving up the ranks quickly. My client wanted to brainstorm on topics like appropriate payout, valuation, timing, and tax implications -- all critical considerations but insufficient when planning a successful transition. I suggested with think first about something else. More important than valuation and taxes, at least initially, is to focus on making sure the transition is successful in the long term. This involves making sure that whoever you are handing over the reins to will be in a position to take over and effectively run the company. It seems obvious, but I routinely see more time and energy spent on the mechanics of the transition than making sure the people who are going to run the company have the skills and confidence to actually do it well. We need not look further than the current attraction to ESOPs to illustrate this point. ESOPs are great for short-term tax solutions, but they too often fail in the long-term because the employees who overtake the organization aren’t properly prepared to do so. In a dream world, you’d sell a business and receive 100% of the profits. This is rare and is especially so in an ESOP or when selling to family or employees. Most often the ESOP will pay a smaller percentage in cash at closing and then will pay a seller note or earnout over time based on the success of the company. In that case, or in the case of transitioning to a younger family member, there may be very little cash received at the time of the sale. When this occurs, the majority of the purchase price is paid for over a period of time from the company’s profits. And this, of course, is why the long-term success of the company is so important. You can hire the best legal and tax team available to work on the mechanics of the transition, but if you don’t educate and empower the new owners, the company will flounder and all the expected transition proceeds will never materialize. In other words, the biggest risk in transition planning via employees, ESOPs, or family succession isn’t improper valuations or missed tax loopholes. It is the future success of the company since all or most of the buyout occurs after the sale is completed. This is why it is critical to spend time, energy, money, and resources doing whatever it takes to ensure your succession team is confident, skilled, and ready to take over and grow the company after you depart. If you own a business and are starting (or wishing to improve) the process of transition planning, think about all the areas that are critical for the success of your business over the long term. Spend your time and resources here rather than the mechanics of the transition. Once your team is ready to take over, then you can shift your focus to the deal itself.
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Preparing for a Downturn7/1/2019 by Dale Gillmore  A strong economy boosts CEO confidence and job production, but it also begs the question, “What’s next?” While the pace of economic recovery since 2008 is subject to debate, the fact is that we have been on a clear growth trajectory for years -- and a very strong one recently. By most measures -- a low unemployment rate, favorable interest rates, a strong stock market, and so on -- the U.S. economy is doing very well. But, if history tells us anything, it’s that, at some point, a downturn will come. It’s just a matter of when. The important question to answer, therefore, is how can we position our businesses to not only survive the tough times but thrive despite them?
Having successfully steered multiple businesses through several booms and downturns, we offer here our insights into how you can prepare your company today for a less robust economy in the future: 1. Utilize your sales channel to expand new products, services. One of your most important assets is your sales channel and existing customers. Use that channel to expand during a recession by offering “adjacent” services to existing products (example: a warranty or free delivery service), extending services that might position the company for growth beyond the core business, and/or entering new markets through alliances, partnerships, mergers and acquisitions, or even franchising your product. In this way, you can grow the company without having to invest in new production facilities or inventory. 2. Carefully consider credit. Most businesses have some form of a line of credit -- a loan on demand -- which can help with capital when the going gets tough. Currently, banks have more money than borrowers, so it’s a good time to consider increasing your line of credit and establishing new credit facilities “just in case.” Many companies go out of business during a recession because they run out of capital. Just be sure that, whatever you borrow, you can pay back. A recession is not the time to be scrambling to meet minimum payments. Another strategy for increasing your cash flow during a downturn is through a change in credit terms from your vendors and to your customers. A change in how you pay suppliers -- from 30 days to 45 days, for example -- could make a big difference. Conversely, if your sales terms are overly generous, you will need to finance cash needs that could be met by better billing and collection practices. Lastly, determine if your suppliers are giving you their best deals. 3. Outsource what you can. You already outsource more than you think: shipping of your products, your tax return, your insurance. You may even outsource some or all of your manufacturing overseas. In an economic downturn, a key strategy is to convert fixed costs to variable costs, and outsourcing is a great way to do it. HR support functions, payroll, benefits administration, accounting, manufacturing, transportation, virtually all the non-strategic aspects of your company can be outsourced. Even your executive staff can be outsourced! Why pay a full-time CFO when a fractional CFO or one utilized through our firm can do the work at a cost well below the benefit? 4. Identify and create flexibility and liquidity with non-liquid assets. During the last recession, virtually every U.S. car company except one, Ford, had to be bailed out by the government. Ford saw the recession coming and sold and leased back their facilities, creating a huge “rainy day fund” of capital that it later used to weather the recession. You could potentially do the same by reinvesting the capital tied up in your real estate into the production and growth side of your business (but please proceed with caution). Review your personal and business assets to understand where your “creative” opportunities exist. Of course, you should consult with a seasoned advisor before proceeding with any option that affects your assets -- especially ones that have substantial equity. We cannot pinpoint when a downturn will come, but history dictates that it eventually will. Prepare now for the eventual storm clouds of recession. We’re here to help.
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 by Dave Swartzendruber The importance of the professional and personal relationships that financial planners and wealth advisors have built with their clients is a critical one and one we look to support. Still, there may come a time when your clients require guidance on business valuations, buying markets, and transitions, and it’s then that you’ll need to partner with a trusted M&A advisory firm to meet their needs.
Even if your business owner clients aren’t looking to immediately transition, the time to forge a partnership with an M&A firm is now. M&A has become the new normal in the wealth management industry with larger wealth advisory firms growing their ranks with in-house exit planners. Your clients are looking for a wealth advisor with M&A capabilities whether you realize it or not. They need to understand markets and their business value to achieve the financial planning goals they’ve set with you. Here are a few questions we hear most often from potential financial advisor partners: When is the right time to introduce an exit planning professional or an M&A firm to your business customer? It’s never too early to introduce the right exit planning professional or M&A firm to a business owner. It’s especially important when a business owner’s retirement is contingent on the sale of their business and when the assets portfolio is predominantly illiquid. How do you know who is the right fit for your client? A team of well-rounded professionals that can address your client’s limited succession options -- especially when liquidity options can’t be met -- is your best solution. What does a partnership look like? A good partnership takes a long-term view of the relationship with you and your clients. At Quest, we often find that our most productive relationships evolve out of early, exploratory discussions with prospective clients that allow both parties to get better acquainted professionally and personally. As we build our relationship as partners, we welcome and look for opportunities to provide insight, feedback, and assistance to you and your clients in collaborative and mutually beneficial ways, including:
Such discussions are an important part of our ongoing client development activities. We recognize the important role you play in ensuring your clients’ success. Our mergers and acquisitions professionals can complement your expertise to deliver outstanding results. If you have a client considering a sale or a recapitalization, or simply want to kick-start the conversation about an eventual transition of business ownership, we can help you and your client evaluate options and navigate the transaction process with confidence.
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Position Your Company For Value5/15/2019 by Dale Gillmore  The average transaction takes less than a year to complete, but becoming “deal ready” takes years. Every business owner wants to receive maximum value for their business at the time of their exit. That’s a given. Unfortunately, too many owners discover they have not put enough thought into a growth strategy to achieve that value, and they’re disappointed by the offers they receive when it’s time to sell. It doesn’t have to be this way. You can adopt sound strategies and practical techniques now that will positively position your business for transition. You just need some right information first. 70 to 80 percent of businesses put on the market don’t sell (Exit Planning Institute). We think this failure rate is largely due to unmet owner expectations -- the surprises and disappointments they face from potential buyers at the time of transition. No two businesses or owners are exactly alike, but many of the challenges they face as they endeavor to build maximum value – and exit on their terms – are similar. In working with business owners, we continually ask them to answer these 5 questions as we seek to build value and plan for transition. What’s my business’ actual value right now? Identifying value is the first step because it gives business owners a baseline measurement from which to track value over time. In other words, as they work to build (and hopefully maximize) value, this baseline number is there to gauge their success. If you cannot see increasing value, how can you know if the strategies you’re implementing are working? But, the benefits of identifying your business value don’t stop there. Business value impacts the owner’s personal life, too, a fact often missed by business brokers. If you think your business is worth $15 million, but it’s only worth $9 million, that discrepancy will seriously impact your personal estate planning decisions and post-exit lifestyle choices. Wouldn’t it be better to know the reality of your business value far in advance of a transition, while there’s still time to do something about it? What’s my real number? Just as important as identifying value, it’s just as critical to understand now the approximate dollar amount needed to live the post-exit lifestyle you desire. There are many variables that go into determining your number, but basically, we’re going to want to take stock of your future obligations, goals, and dreams. The tasks we must tackle include:
How can I eliminate risk to protect my business? Business owners face a seemingly endless list of risks: lawsuits, regulations, technology, debt, customer concentration, human and intellectual capital, business model disruption, natural disasters, safety/compliance, embezzlement, death/disability, and cybersecurity, just to name a few. The more risk that your business bears, the less someone will be willing to pay for it. Protecting business value, therefore, entails addressing and mitigating current and potential risk-related issues (business, financial, and personal). Have you begun that process? Do you even know where to begin? How can I build value – in every way? Building value is a necessary step for every business owner regardless of circumstances. Why?
Which transition option is best for me? Again, every business is different. No single transition option fits the needs of every business owner. If someone is trying to sell you an “out of the box” approach to transition, keep moving. From family/intergenerational transfers to management buyouts, sales to existing partners, third-party sales and even liquidations, there are lots of roads to consider. Our passion at Quest is to educate clients on the options available to them so that they make the best decision -- a decision which can only be made by weighing each transition option against individual business, financial, and personal goals. Is your current transition advisor asking guiding you in this way? If you have questions about maximizing the value of your business, you'll want to check out how Quest managed succession planning for this business. Remember, we are here to help align your personal and business goals.
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by Dale Gillmore
Prior to the 2017 tax reform bill, investors were able to utilize a popular tax-deferral strategy known as a 1031 exchange to defer capital gains on like-kind exchanges -- essentially disposing of one asset and acquiring another replacement asset to avoid generating a current tax liability from the sale of the first asset. Tax reform provided yet another strategy: investment in Qualified Opportunity Zones. Investors seeking preferential tax treatment of capital gains would be wise to consider investment into these economically-distressed communities.
How it works Subject to the requirements below, a taxpayer can defer immediate recognition of the gain, and, depending on the holding period, get a reduction in the amount of gain realized through a basis adjustment and possibly eliminate tax on the realized appreciation in the value of the interest/assets held in a “Qualified Opportunity Fund.” A Qualified Opportunity Zone is an economically distressed community that has been designated as a “qualified opportunity zone.” A list of qualified zones can be found here. The steps and requirements are as follows:
Conclusion
Investment in Opportunity Zones provide significant planning opportunities for many investors and has the potential to generate additional long-term investment in areas most deserving. It may be a useful tool in capital gains deferral, particularly for individuals, funds, and companies considering investments in low-income communities, and could be ideal for private-equity funds and real estate developers for raising equity. At the very least, this new incentive program provides a capital gains deferral mechanism for short-term investments in a form that is more attractive than current Sec. 1031 like-kind exchanges. The numerous requirements and technicalities to utilizing the Opportunity Zone tax deferral, as well as the factors involved in deciding where to invest, mean you shouldn’t make this decision alone. An advisory firm steeped in real estate investment strategy and tax savings strategies is your best bet. We're happy to help you get started.
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by Dale Gillmore The average transaction takes less than a year to complete, but becoming “deal ready” takes years. Every business owner wants to receive maximum value for their business at the time of their exit. That’s a given. Unfortunately, too many owners discover they have not put enough thought into a growth strategy to achieve that value, and they’re disappointed by the offers they receive when it’s time to sell. It doesn’t have to be this way. You can adopt sound strategies and practical techniques now that will positively position your business for transition. You just need some right information first. 70 to 80 percent of businesses put on the market don’t sell (Exit Planning Institute). We think this failure rate is largely due to unmet owner expectations -- the surprises and disappointments they face from potential buyers at the time of transition. No two businesses or owners are exactly alike, but many of the challenges they face as they endeavor to build maximum value – and exit on their terms – are similar. In working with business owners, we continually ask them to answer these 5 questions as we seek to build value and plan for transition. What’s my business’ actual value right now? Identifying value is the first step because it gives business owners a baseline measurement from which to track value over time. In other words, as they work to build (and hopefully maximize) value, this baseline number is there to gauge their success. If you cannot see increasing value, how can you know if the strategies you’re implementing are working? But, the benefits of identifying your business value don’t stop there. Business value impacts the owner’s personal life, too, a fact often missed by business brokers. If you think your business is worth $15 million, but it’s only worth $9 million, that discrepancy will seriously impact your personal estate planning decisions and post-exit lifestyle choices. Wouldn’t it be better to know the reality of your business value far in advance of a transition, while there’s still time to do something about it? What’s my real number? Just as important as identifying value, it’s just as critical to understand now the approximate dollar amount needed to live the post-exit lifestyle you desire. There are many variables that go into determining your number, but basically, we’re going to want to take stock of your future obligations, goals, and dreams. The tasks we must tackle include:
How can I eliminate risk to protect my business? Business owners face a seemingly endless list of risks: lawsuits, regulations, technology, debt, customer concentration, human and intellectual capital, business model disruption, natural disasters, safety/compliance, embezzlement, death/disability, and cybersecurity, just to name a few. The more risk that your business bears, the less someone will be willing to pay for it. Protecting business value, therefore, entails addressing and mitigating current and potential risk-related issues (business, financial, and personal). Have you begun that process? Do you even know where to begin? How can I build value – in every way? Building value is a necessary step for every business owner regardless of circumstances. Why?
When we talk about value, we’re really talking about two kinds of value: tangible and intangible. Tangible value is the “easy to see” stuff -- plant and building improvements, systems upgrades, marketing, and so on. Intangible value is everything else that matters: human capital, customer capital, structural capital, and social capital. When it comes to valuing a business, intangible value just as important as tangible value. You’re wise to focus on building both. Which transition option is best for me? Again, every business is different. No single transition option fits the needs of every business owner. If someone is trying to sell you an “out of the box” approach to transition, keep moving. From family/intergenerational transfers to management buyouts, sales to existing partners, third-party sales and even liquidations, there are lots of roads to consider. Our passion at Quest is to educate clients on the options available to them so that they make the best decision -- a decision which can only be made by weighing each transition option against individual business, financial, and personal goals. It's just what we do. Is your current transition advisor asking guiding you in this way? If you have questions about maximizing the value of your business and/or need help aligning your personal and business goals, please reach out. While we advocate doing this years in advance of a planned transition, we can successfully navigate you through a transition when emergencies arise. Just give us a call.
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 by Dave SwartzendruberAs a business owner, your business has consumed the majority -- if not all -- of your time. It’s made of your dedication, your employees, your stories, accounts won and lost, systems and process, and so much more. So, when a potential buyer comes along, who will evaluate your business through a far different lens than yours, their emotionless questions can be jarring. And, whether you work with a broker or not, your buyer must decide whether to bid based on the answers you provide to their questions. To do that, you’ll have to be prepared. Unless you’re being rolled into a larger company or dismantling individual assets, you’re essentially selling the present value of future cash flow, an imperfect estimation based on both objective and subjective factors. A buyer must decide whether to bid after careful examination of both negative and positive aspects. Depending on structure and interests, what’s negative to one buyer may be positive to another (e.g., existing non-owner management, real estate). You won’t be a good fit for everyone, and that’s OK, but you’ll still need to be able to answer the questions. Keep in mind, these questions are not even close to the due diligence questions we’ll discuss in another blog posting. Decades of experience tell us that, in initial calls, buyers are trying to determine the following:
Knowing what to expect is half the battle. In addition to the obvious questions surrounding financials, here are 10 questions you’re very likely to hear: 1. Why are you selling your business and why did you get into this business in the first place? What excites you about it? 2. Can you describe your management team’s strengths and weaknesses? What problem does your company solve? Why do your customers choose you over your competitors? 3. Walk me through the entire process of your service/product line. What are your company’s competitive differentiators? 4. What is your day-to-day role in the business? 5. What would your ideal transition look like? What do you want to do post-sale? 6. What are your expectations of a buyer? 7. Other than you, who are the leaders/executives in the company? What are their current and potential roles? When a problem arises, who deals with it, and how? 8. How long have your employees been with you? Why do they stay (or leave)? 9. What capital expenditures are made annually in this business, and on what? 10. What opportunities exist in this market through the next 3, 5, 10 years? Whatever the question, be honest. The truth will come out in due diligence anyway, and little white lies have an uncanny ability to end negotiations. Plus, your business deserves the right buyer, and you deserve a peaceful exit. Honest responses to buyer questions will produce both. Selling a business is a huge and meaningful transition, and no one article or list can do it justice. As you prepare for the journey, reach out to us for assistance. Together, we can make your transition a successful one.
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Welcome!3/7/2019  We're glad you're here. Please check back frequently, or sign up for instant notification to updates to our blog. The Quest TeamAdvisory-Business Succession-M&A
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Attend Our Next Event1/9/2019 Selling a business is an exciting time. Proper planning and pre/post deal execution are critical success factors. Join us for a complimentary lunch at Ruth's Chris Steakhouse, Charlotte, for a interactive discussion on the following topics:
Wednesday, February 20, 2019 11 a.m. to 12:30 p.m. Ruth's Chris Steakhouse, Southpark 6000 Fairview Road, Charlotte, 28210 |
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