Business Owners Can Plan Their Exits Using These Strategies
June 26, 2023
Businesses use succession planning to help make it a smoother process to transition a business to new leadership or ownership. First Independent Bank recently convened a panel of experts to discuss how business owners can successfully exit their businesses, whether through a sale, passing it on to the next generation or giving management the opportunity to take over the company.
Whichever exit approach an owner chooses, determining the business’s value is the first step toward a transition.
“Cash flows and assets are critical drivers of a business’s value,” said Brian Foltyn, who leads the Valuation & Related Financial Services practice at REDW Financial Advisors & CPAs, with offices in Arizona, New Mexico and Oklahoma. “Having positive cash flows showcases a business’s financial strength, and the assets represent the resources that contribute to the revenue that ultimately generates these cash flows.”
When planning a transition, Foltyn said it’s important to stay abreast of what’s happening in your industry and be aware of the profound impact the COVID-19 pandemic had on business, which shifted how valuations are conducted.
For example, pre-pandemic financial performance may not be indicative of the company’s future performance. Now, the tried-and-true measure of earnings before interest, taxes, depreciation and amortization (EBITDA) has evolved into EBITDAC, with the “C” representing COVID adjustments. Those adjustments could include supply chain adjustments or cleaning expenses that didn’t exist before the pandemic.
Find the Right Intermediary
While it’s widely believed that getting married, having children and buying a house are the three most important decisions people ever make, Empire Business Solutions CEO Larry Lerner argues that selling a business should be included on the list.
“If you buy the wrong house, you sell it and you maybe make or lose a little money,” Lerner said. “If you buy or sell a business without the right team in place, you can make critical mistakes that can greatly affect you and your family. You need the right law firm, lender and M&A intermediary or business broker.”
M&A intermediaries typically sell companies valued at more than $1 million, while business brokers work with companies valued at less than $1 million. Selecting the right broker or intermediary to represent your business is crucial.
Most states don’t require a license for someone to act as an intermediary to sell a privately held business, so it’s important to choose one that is experienced in handling such transactions.
“There are many different ways to structure a deal, and it’s important the intermediary is familiar with the different structures and has the ability to think outside the box,” Lerner said. “The intermediary should have the ability to communicate well and understand goals and objectives and be able to explain these goals and objectives in clear and simple terms.”
‘I Want to Buy a Business’
An estimated $10 trillion is tied up in about 12 million businesses owned by retiring baby boomers — 70% of which are expected to change hands over the next two decades, according to the California Association of Business Brokers.
The likely buyers are younger baby boomers who have accumulated some wealth and realize they haven’t fulfilled their dreams and are starting to think, “Hey, I want to buy a business. What can we do to finance it?” according to Roe Beltzer, Small Business Administration (SBA) Production Manager at First Independent Bank.
One program under the SBA umbrella is the 504 product, which generally finances the real estate portion of an acquisition. Buyers can finance the purchase of a company through the SBA’s 7(a) program, which provides commercial and industrial loans with a guarantee that the government will pay 75% of every dollar lost if the business fails.
The loans, which usually require 10% down, can finance commercial real estate building and construction loans for up to 25 years, or business acquisition, equipment, franchises, working capital and some startups for up to 10 years.
“The 7(a) program really covers the financial needs and provides the solution for the client,” Belzer said. “It’s a commercial industrial loan with additional credit enhancements through a government guarantee.”
‘What Happens to My Stuff When I Die?’
Having a plan for what will happen to your business after your death is crucial to ensuring that your assets are passed on to your beneficiaries in the way you desire.
“The basic question is, ‘What happens to my stuff when I die?’” said Charles Lin, a partner in Procopio, a West Coast-based law firm. “Estate planning can get very complicated. It just depends on how prepared you were prior to passing.”
Without an estate plan, your assets likely will wind up in probate court, which means your beneficiaries will have to go before a judge before any funds can be distributed, Lin said.
“People don’t like it because the docket is quite crowded, and it takes a long time,” Lin said. “It could be a year before the surviving spouse gets to do anything of significance with those assets.”
To avoid the probate court process, Lin suggests putting all assets — including business interests — into a living trust. The person named as the successor trustee will control the trust according to the terms set forth, which could include the timing and conditions of distributions.
“You can control the timing and conditioning of your gifts, or you can specify who is to get what under what condition or at what age,” Lin said. “We like to use the term ‘control beyond the grave.’”
Planning for your business succession requires significant thought and planning. First Independent Bank can help, with trusted advisors who understand the challenges and rewards of this exciting phase of life. We invite you to explore our SBA loan options and contact a banker today for a personalized consultation.