Business owners plan and adapt to a lot of things for their day-to-day operations. That’s never been truer than this past year amid the coronavirus pandemic, when many business owners either pivoted their operations or altered their business model altogether.
What often gets lost in the hustle of attracting customers, boosting sales and making payroll is how to ensure one’s business can survive the loss of a founder or top leader — whether they depart, retire or die — and continue to grow and flourish.
Moreover, many business owners are making retirement plans, which, for some, were accelerated by the pandemic as their priorities shifted.
As a result, there may be a growing interest in succession planning. Yet, many business owners do not have one in place. According to the National Association of Corporate Directors, fewer than one in four private company boards say they have a formal succession plan in place.
“Many business owners put years or decades of work into making their business a success,” said Jim DeVolld, managing director, commercial banking, First Independent Bank. “Perhaps some of those same owners, who have worked so hard building their business have given little thought about what happens when they want to retire, sell their business or move on to new challenges.”
This prompted First Independent Bank, along with Southern Nevada’s Bank of Nevada, on May 26 to host a virtual panel discussion on the matter called “Succession Planning, How to Prepare & Value Your Business.”
WHAT’S THE VALUE?
Katrina Loftin, co-founder and managing partner at M&A Business Advisors in Reno, pointed out that about 60% of businesses are estimated to sell in the next five years.
“That’s because there’s such a large number of Baby Boomers that own businesses,” Loftin said. “So you should definitely start (succession) planning now if you haven’t already.”
The first step for those planning to retire and sell their business, Loftin said, is figuring out the value of their business. The process should include engaging with expert advisors to review the company’s financials and determine its market position.
This, she said, will help the business owner understand the factors that impact the value of your company, ranging from the positive (good management, diverse customer base, steady and moderately increasing sales) to the negative (minimal product line, lack of contracts, varied and declining sales).
“Everyone knows that COVID happened, but the banks really do want to see you bouncing back from that,” said Loftin, noting that being diversified is also especially important when preparing to sell. “People are usually not aware of this; they’re happy they have one big client. But from a bank standpoint, and a buyer standpoint, that’s not a good thing.
“If you have a client that accounts for more than 15% of revenue, that is not a good thing … If you’re in the manufacturing industry and you don’t have the next generation of products in line, you want to make sure you have that.”
GOOD FOR THE GOOSE?
Using an ages-old idiom as an example, Jim Main, principal at CliftonLarsonAllen in Las Vegas, warned that what’s good for the goose might not be good for the gander.
“The buyer and seller are on two different sides of this,” Main said. “And I’ll be honest with you, one thing we hate to hear is a client call us and say, I just signed an LOI, which is a letter of intent to sell my business. Because, generally, 99.9% of the time, nothing good happens after you sign an LOI. Usually what happens is things come out of the woodwork.”
After all, a letter of intent is negotiated early in the sale process, prior to disclosure of all pertinent information about the business — which is why it’s important to have a team in place that includes accountants, bankers, brokers and appraisers, Main said.
NAVIGATING SBA DEALS
Small business owners looking to sell their business in the near future also need to be prepared for the complications that will arise during the exit process.
One complexity is the tangled web that comes with the buyer of the business obtaining a loan backed by the Small Business Administration’s 7(a) program.
The terms of the SBA financing package are favorable to buyers compared to conventional financing, and more buyers are eligible for SBA financing because the down payment requirement minimum is only 10% of the loan cost, said Roe Belzer, vice president of portfolio management at Bank of Nevada in Las Vegas.
Belzer said the 7(a) loan government guarantee ranges from 50% to 90%, with 75% being the most common amount. He noted, however, the federal stimulus package that was passed in December 2020 led to the SBA temporarily increasing the government guarantee to 90% through Sept. 30 of this year.
A buyer can borrow up to $5 million, and funds can be used for business acquisition; practice acquisitions; stock or asset purchase; expansion through acquisition; partner buyout; and key manager buyout.
Buyouts, Belzer noted, have to be 100%.
“If you’ve got a partner that wants to retire on a part-time basis, and they just want to sell a portion of their ownership, that can’t happen,” he continued. “They need to be fully acquired out of the company, and we have to leave within 12 months.”
