Announcement: PPP Loan Forgiveness and EBITDAC II

PPP Loan Forgiveness Special Webinar

Just a heads up. folks. On Friday I will be participating with an attorney, James Rosenblatt, and a CPA, Steven Bankler, in a national online Q&A session on PPP loan forgiveness.

It is under the auspices of the Exit Planning Exchange – Global. Unlike many such webinars, we are allowing 15 minutes for presentation and 45 minutes for questions. (Any participant can ask questions.)

It is free, but registration is required. Register here. https://exitplanningexchange.com/event-3844443 

EBITDAC II

My post about EBITDAC a few weeks ago has generated considerable attention and lots of hits on Awake. We still see heavy traffic to the original post,

It was reprinted (reposted?) on The Alternative Board International’s site.

I discussed it in another national webinar for XPX.

And finally, our discussion about it was chosen by Jim Blasingame of “The Small Business Advocate” radio show as his interview of the week. I’m scheduled to continue that discussion Friday on Jim’s show.

Thanks to everyone for how they help business owners understand more about the fast-changing changing world around them!

 

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Protect Your Business with A Solid Continuity Plan

A Solid Continuity Plan

A great characteristic of successful business owners is that they are optimistic people. They have a “can do” attitude, setting their goals high, taking risks, hiring the right people, constantly striving to improve the delivery of their service or product, with a constant drive to build their entity into one of great significance.

As a result, the experience of building a successful company may give the owner great pride of their achievements, and often a strong identity of who they are, and that’s normal human behavior. But because of that, the thought of an event that causes the owner to Suddenly leave the business due to death or a disability, is often never planned for and is overlooked. If such an event were to occur, it would not only jeopardize the value or even the survival of the business itself, especially if the business is heavily reliant on the owner or a key partner, but it also jeopardizes the future career paths of key employees and others, and leave customers scrambling to find somewhere else to go.

Often in the minds of the owner or even their advisors, is the notion of simply making sure that the owner’s family is taken care of in the event of the owner’s death or disability, which is certainly needed. But business continuity planning goes much further than that. A solid business continuity plan is the planning that includes agreements, procedures, employee incentives, and safe guards, that are stipulated in writing or put into place to help enable the business entity and all of its successors, key employees, venders, operations, procedures and customers, continue on a successful path, with as little interruption as possible,  in the event that the owner/s are no longer present.

For instance, who will fill the slot of Chief Executive or Chief Operating Officer? Does the remaining management have a plan and have the financial resources suddenly available if the immediate staff needs to search and bring in somebody from the outside to fill that position? Should they begin, now, to groom key employees for that role? How will the key vendors and creditors and customers be handled? What additional training of other employees and departments will need to take place? What will you tell the customers and the community to maintain confidence in the company in the event of an owner death or disability? What plan will you put in place to entice the key employees to stay around in order to ensure the internal integrity of the operations?

The reality within the marketplace is, if the business is left paralyzed and vulnerable, they risk losing key customers, creditors, and key employees may be quickly recruited by competitors.

Building a solid continuity plan makes complete sense from all of these angles. Plus, the good news is that it is a required step within the exit planning process, for the most part, and helps to build the value and marketability of the organization.

There are a number of areas that a solid continuity plan addresses, including the creation of a Buy-Sell Agreement, or amending or replacing one; the disposition of ownership interest, which is done through estate planning documents; insurance to fund the Buy-Sell Agreement; a management continuity reward program; retaining key employees after death or disability; a stay bonus plan; a process for terminating personal guarantees for business obligations, business continuity instructions; and a “Buy-Back” agreement for minority owners. There are other potential areas to address, but for sake of discussion, these are the likely critical areas.

Key Documentation

Buy-Sell Agreement – This document is created to summarize the terms of the written agreement that will govern the ownership transfer and ownership rights aspects of the ownership interest of the primary owner/s and other members of the controlling interest group. This document also covers a variety of issues related to the rights and responsibilities of the owners who are parties to the agreement.

Disposition of Ownership Interest Through Estate Planning Documents – This summarizes the intentions and issues that are most important to the owner in the event that the owner dies while holding the ownership interest in the company. This is carried over into the continuity plan and are created within the personal estate planning documents.

Insurance to Fund A Buy-Sell Agreement – The purpose of this exercise is to recommend and select the appropriate type of life insurance and disability insurance related to the purchase and sale of the owner’s interest in the company. Proceeds from the policies are used to purchase the owners interest.

Management Continuity Reward Program – This is to address the benefits that the owner intends to provide to the individuals who take over the management responsibilities in the event that the owner should die or become disabled, and is unable to perform the regular responsibilities.

Retaining Key Employees After Death or Disability – This is the section of the plan that addresses the steps to be taken in the event of the owner’s death or permanent disability in order to retain key employees. This is not intended to include incentive and reward planning for key employees, which is more properly addressed in a separate component of the owner’s overall planning. Instead, attention is given to the particular issues that are relevant to the key employee retention when a majority or controlling owner is unexpectedly absent from the company. This is intended to alleviate the anxiety of the successor management staff, and help allow them to concentrate their attention on the continued success of the company.

Stay Bonus Plan – Develop a written agreement that would become effective upon the owner’s death or disability. The Stay Bonus Plan acknowledges the criticalness of the employees remaining with the company after the owner’s death, disability, or for that matter, the owner’s exit from the business. The plan provides confidence and support to specific employees who choose to remain with the company and provides substantial financial reward for them doing so.

Terminating Personal Guarantees for Business Obligations – This is a stipulation of steps to be taken in order to protect the company in the event that the owner’s personal financial resources are no longer available to support the financial activities of the business. In the event of death or disability, the relationships of the company may require that the business demonstrate financial stability in order to continue their relationship.

Business Continuity Instructions – Written instructions that are completed, signed, and stored with the owner’s other important personal documents related to the owner’s death or disability.

Buy-Back Agreement for Minority Owners – The purpose of developing this agreement is to state the situations in which an employee owner’s interest will be purchased by you or the company in specific situations that may arise. It also governs the employee’s ownership interest while he or she is an owner, and addresses certain rights and responsibilities that are associated with the owner’s status and other terms related to ownership.

 

Work Flow Diagram

Over the years my staff and I have developed a work flow diagram to help the owner understand how we can approach the development of a Business Continuity Plan. Although, every situation is different, it gives you a general idea of how it may come together

But, the bottom line is, a solid Continuity Plan is critical for you, as a business owner, to develop and maintain, in order to help ensure that your business, which you and your staff have worked so hard to build, maintains its integrity and success in the event that something should happen to you.

Steven Zeller is a Certified Business Exit Planner, Certified Financial Planner, Accredited Investment Fiduciary, and Co-Founder and President of Zeller Kern Wealth Advisors. He advises business owners with developing exit plans, increasing business value, employee rention, executive bonus plans, etc. He can be reached at szeller@zellerkern.com.

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EBITDAC : What is Your Business Worth Now?

Several friends have sent me a picture of an EBITDAC coffee mug this week. As it states, EBITDAC stands for Earnings Before Interest, Taxes, Depreciation, Amortization and Coronavirus. Will this be the new measure of cash flow for valuing your business?

EBITDACA bleak joke, but one that is on the minds of many business owners, especially Baby Boomers in their late 50s and 60s. Many were postponing their exit planning because business has been so good. As one client told me, “In March we had the best year in the history of my company. It looks like April might be the worst.”

Downturns aren’t new, and recent history has more “Black Swan” downturns than most. Boomer owners have lived through the dot-com crash, 9-11, and the financial/housing bust. Even the Great Recession, however, was when most Boomers were in their mid-40s to early 60s. Most had ample time to recover, and to resume their business-building activities.

This downturn hits 4,000,000 Boomer owners when the youngest is at least 55 years old. The recovery time is uncertain, and regulatory restrictions on their businesses may be reimposed, perhaps more than once.

Factoring the Coronavirus in Valuations

Most Main Street acquisitions (under $3,000,000) rely on financial results over the previous five years for valuation. Those years have generally been good. In the middle market, professional buyers’ due diligence requests often seek results from 2008-2009 as an indicator of a business’s resilience in a contracting economy.

I think we can safely assume that both Main Street and mid-market acquirers will be carefully looking at the sustainability of your business through COVID-19. How much it affects your company’s valuation will depend largely on what type of business you own, and how you reacted to both any shutdown and the period immediately following.

One issue will be how buyers perceive the impact of Paycheck Protection Program loans and their forgiveness. It appears at the moment that the PPP loans will not be considered taxable income when forgiven. There are IRS rules for non-taxable loan forgiveness, but it will likely still appear as additional margin on your books. (The expenses it paid will still be deductible.)

You can be certain that buyers will be backing out the PPP loan forgiveness when valuing your business. They won’t be very interested in paying multiples of a one-time “free money” event.

EBITDAC : Short and Long Term Impact

Some businesses will see an immediate effect on their selling prices. Others may have a lingering change in how buyers look at their worth.

First, buyers will look at the scope of the coronavirus’ impact. Restaurants, caterers, event support, transportation (airlines, rental cars, party buses) and other hospitality related industries will be the worst. Not only are they the most affected, but they face the possibility that they resume with limitations on their business (social distancing in restaurants or limited passengers in vehicles, for example.) Any buyer would have to anticipate another period where they can’t generate substantial, or any, revenue.

If a business like those survives the shutdown, finding a buyer will be challenging. Third-party lenders will shy away from any involvement. Cash flow will remain tight, and credit will be harder to find.

The good news for those businesses is that the virus will end. When it is no longer a threat (presumably either because we find a vaccine, or we build herd immunity after a couple of seasons,) valuations should return to something more normal.

Other businesses will see valuations change over a longer period of time, and for different  reasons. They will be judged either by their ability to recover quickly, or by how their model changes to take advantage of life after the virus.

Regardless of the impact, some owners will use the pandemic as an excuse for years to come. Others will adjust and move forward. (See my description of an owner who was still blaming the Great Recession a decade later here.)

Planning for Your Comeback

Whether your business is essential and working much like before the pandemic, or non-essential but functioning pretty well remotely. this virus is going to change your strategy.

For an obvious example, lets take video conferencing. How are you preparing your sales team for the return to normal? Will they be more efficient? Are they able to cold call? Should their expense accounts be lower? Or are they (and you) just waiting to go back to what they did before?

If you are a manufacturer or a contractor, perhaps your business has been very healthy during this lock-down. What will happen afterwards? Will new competitors push into your market to replace business that they lost? Might some customers fade away, while others discover a newfound need for your offerings?

If you are surviving, how can you thrive? Do you expect landlords with empty space to negotiate cheaper rents? Will some skilled employees be looking for new jobs? Should others become pricier because of increased demand for their skills? Can the automation you implemented for remote work be extended to new efficiencies or new opportunities?

EBITDAC and Post-Coronavirus Exit Planning

If you were anticipating retirement before the pandemic, are you accelerating your plans or putting them on hold for a while longer?

In either case, you’ll need to understand the impact of the virus on your company’s value. EBITDAC 2It may be dramatic and immediate, or it may be only obvious afterwards when your performance is matched against that of your peers.

The definition of a Black Swan is “An unpredictable or unforeseen event, typically one with extreme consequences.” COVID-19 certainly fits the definition. It already has extreme consequences, but many of those are yet to come.

It’s not hard to figure out. Those who plan for a different world will do better than those who are taken by surprise. In either case, the impact of the “C” in EBITDAC will greatly influence any value generated by your transition from your business.

John F. Dini, CExP, CEPA is an exit planning coach and the President of MPN Incorporated in San Antonio Texas. He is the publisher of Awake at 2 o’clock, and has authored three books on business ownership.
Posted in Exit Planning | Tagged , , , , , , , , , , , , , , , , , , , , | 8 Comments

8 Responses to EBITDAC : What is Your Business Worth Now?

  1. Jim Maher, EPI STL Chapter President says:

    Love your thought leadership!!

  2. Julie Keyes, EPI Twin Cities Chapter Pres says:

    Good article, John!

  3. Ed Pratesi says:

    Great article!

  4. Frederic Farcy says:

    Good Stuff John

  5. Bill Entwistle says:

    Great article John. Glad to see that you discuss “Planning for Your Comeback”, as I think that many businesses will need to “grow” their way out of this situation. There are enough doom and gloom articles out there, we need to provide these business owners some hope and optimism.

  6. Craig Noto says:

    Thank you John ,Great Article, I am so glad you send out these newsletters as i am in the transition cycle right now and having a succession plan is the most important to all business owners. Im so glad that i was part of TAB for over 8 years and learned about balancing work & play and building teams that can run the company with out me. Stay Safe out there

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Morlocks and Eloi and the Virus

HG Wells in Time MachineAs I interact via Zoom and telephone with clients, family and friends, I keep thinking of H.G. Wells’ The Time Machine. As a life-long science fiction fan, I see our surreal living situations born of the world-wide coronavirus epidemic as separating us into different “classes” of people, who are quickly developing different views of the world around them.

In Wells’ novella, the Eloi are lotus eaters. Living in a classic paradise of beautiful weather and constant leisure, they’ve forgotten the instinct to innovate, and lost their survival skills. The machines that make their idyllic lives possible are maintained by the Morlocks, bestial beings who live underground and fear the light. The Morlocks, however, retain the ability to think, and survive by eating the Eloi.

Let me say here that the rest of this article is about the differences created by our current forced roles in society. I don’t think that any of us are really like either the Morlocks or the Eloi.

The Essential On-site Workers

Some of us are trying to work just like we did before. We go into factories or other essential businesses, where we interact with co-workers, customers and vendors. This is despite the fact that, outside of the workplace (and sometimes inside it) the media is feeding a constant message about why we shouldn’t be doing this.

We practice social distancing as much as possible, but we still have to cooperate. Some tasks require more than one person. Perhaps some areas of the company where we freely roamed are now “off limits.”

If we are first responders or medical professionals, we have to ignore distancing. There is a very real physical danger in what we do, but we do it anyway because we are needed. We do it up close and personal. Increasingly, we do it without the protective apparatus we always had before, even though the risk is greater.

Regardless of the type of essential business we are in, we all leave work eventually. When we shop for food, we see others in masks and standing on designated spaces 6 feet apart. We sometimes wonder whether we should do the same, since it wasn’t the practice at work. We worry that when we return to families who were isolated all day, we might be bringing the danger home to them.

The Remote Workers

Some of us work from home in non-essential industries. Others are designated as essential, but work remotely because we can. Still others rotate between remote and onsite work, trying to accomplish the same things whether we are at the business or at home.

We aren’t as productive, but can’t be sure whether it’s because we are distracted more or business has just slowed down. (Actually, if we have children at home we know that we are distracted.) We try to maintain a work day schedule, but the difference between Monday through Friday and the weekend has blurred. The novelty has worn off.

We are reminded of the words of Maggie Smith as the ageing Grande Dame of Downton Abbey, when her attorney-nephew proposed working in London during the week and spending weekends on the estate. She said “What is a ‘weekend’?” We were envious of that lifestyle when we first heard it. Now, maybe not so much.

Because we are at our computers, we check the news more frequently, especially “the numbers.” Our paranoia about contact with others increases daily. We avoid going out, and stare down people who come too close to us in stores. As the infection count rises, we worry about how long we can avoid being one of them.

The Non-Workers

Millions of us are out of work involuntarily. We wonder why our businesses are less important than others. We feed, transport and care for the appearance of the rest, why have we been left behind? What is specifically dangerous about cleaning a hotel room or standing six feet away from someone choosing a new pair of pants?

Most of us started suffering financially with the first missed paycheck, but others are educated, career-oriented professionals. We haven’t collected unemployment in our lives. How do we land on our feet when all our skills and experience apply to an entire industry that isn’t hiring?

On the lower levels, wages were finally increasing in real terms after a prolonged period of full employment. When we go back to work, if we go back to work, will it be for less?  Will we be among the lucky ones? Will our former employers be among the surviving businesses, or will we be competing with someone else’s ex-workers for their jobs?

Some of us are elderly or ill. We’ve lost whatever social interaction we had. We may not own a computer. In our living centers we are being fed in our rooms. There is no bingo, no mall walks, and no church activity. We are more convinced by the day that going outside is a death sentence, and are increasingly dependent on others to help us obtain basic necessities (which may not even be available.)

The Next New Normal

Eventually, most of us will go back to doing what we were doing before. The rules may have changed, but humanity has a genetic ability to build herd immunity. What is happening now to the whole planet is the second time around for many indigenous people, who were decimated by diseases brought by early explorers.

Estimates of the expected infection levels range from 20% of the population to 80%. With a world population of 7,800,000,000, and the infection count now reaching 1,000,000, that means we are currently at six-tenths of 1% of the lowest estimate. Even with 80% of that number getting only mild symptoms, that equates to over 300 million people who will be seriously sick. It could be a lot more.

Even with the current “rapid” rate of spread, things will not change for some time. Isolation may be lessened, or dropped for a while and reinstituted repeatedly. The one thing that is certain is that some version of this enforced trisection of society will continue for more than a couple of months.

As numerous behavioral experiments with blue and brown-eyed students have shown, humans will easily divide into “us and them” as a basic instinct. We already had a rise in authoritarian governments promoting “us and them” as a basic tenet of their legitimacy. On the world stage, that could be a real issue. An example on a very small scale is the reported rise in offenses against Chinese-Americans. This could escalate to a far greater threat.

We are in This Together

We need to be aware (and beware) of our natural tendency to trust our own tribes more than others. None of us are superior because we go out to work, or because we don’t. If essential on-site workers become ill at a higher rate than those at home, it isn’t because they are stupid or careless. It will all balance out eventually.

Those who stay at home aren’t cowards or slackers. They are doing what they have to in an attempt to protect the larger tribe. Those who can be productive remotely are keeping the wheels of the economy moving. Those who can’t be productive wish they could be.

The best effect thusfar may be to put our political pettiness in perspective. We’ve been like two children in a room full of playthings fighting over the same toy. Whether it’s Nancy Pelosi’s attempt to add a bailout of union pension funds in the CARES Act, or Greg Abbot’s use of hunker-down rules to close abortion providers, the public has made it plain that this isn’t the time for such foolishness.

We aren’t Morlocks and Eloi. Try to take at least one moment each and every day to acknowledge that we are all in this together. Thank the construction worker or supermarket cashier for being on the job. Call a shut-in, or better yet drop off something to brighten their day. Acknowledge the remote worker’s effort to keep the wheels moving with a call or an email.

Your tribe is small when the threats are small. When the threat is bigger, the best defense is for the tribe to get bigger. This is a time to be part of the big tribe.

I don’t usually ask readers to pass it on, but I’ll make an exception for this post. Pass it on, please.

John F. Dini, CExP, CEPA is an exit planning coach and the President of MPN Incorporated in San Antonio Texas. He is the publisher of Awake at 2 o’clock, and has authored three books on business ownership.
Posted in Leadership, Thoughts and Opinions | Tagged , , , , , , , | 4 Comments

4 Responses to Morlocks and Eloi and the Virus

  1. Thomas Dooley says:

    I love reading these Awake at 2am in the morning articles. Take care John, stay safe and looking forward to getting that lunch and beer together.

  2. John McAllister says:

    John Thanks so much for allowing us to pass this on to my FaceBook Friends.

  3. Don Maranca says:

    Great article, John. And agreed!

  4. Bernard Schayes says:

    Thank you for sharing John.

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Exit Planning in a Crisis

Why would you be exit planning in a  crisis? At the height of the economic expansion (a few months ago in late 2019) I was reviewing a company’s financial statements. Their sales were stagnant, and profits were minimal. When I asked the owner why his business hadn’t grown, he responded, “Well, the Great Recession hit our industry pretty hard, you know.”

planning in a crisisTake note that it wasn’t his fault. He was in a hard-hit industry, and the economy dealt him a bad hand. He ignored the thousands of businesses just like his that had grown and prospered in the last ten years.

Once you hunker down behind “It’s not my fault,” it’s easy to stay there too long. First you are glad that you survived. Then you are glad to be making a little bit of money again. Then you wait for the same conditions that made you successful before. If they don’t come, it’s not your fault.

In the meantime, others are coming out of the downturn firing on all cylinders. They used the slow time to get ready; to plan what comes next. When the door of opportunity opened again, they were ready.

Baby Boomers’ Double Whammy

The coronavirus is especially lethal in senior citizens. Many of those are Baby Boomer business owners. They have also suffered a double financial hit. Their retirement account balances are lower, and their businesses, whether closed or just slow, are worth less then they were a few months ago.

Many owners will try to kick the can down the road. “I’ll spend a few years building the business back up, then I’ll sell it.” For some, that was their plan after the recession. Unless you have something new up your sleeve, you may be waiting a long time for the right buyer to come along. In the next economic cycle, you may wait too long. You can only kick that can so far.

If you are a Baby Boomer, the time to be planning your exit is now. That goes double if you are sitting in your house wondering what comes next. Most entrepreneurs started a business because they wanted control over their lives. When there’s an event that takes away that control, your best response is to get it back.

Exit Planning in a Crisis

Your exit plan starts with some basic questions.

  1. Do I know how much I need to retire, with a professional analysis of my living expenses, life expectancy and inflation assumptions?
  2. Do I know how much my company is really worth, and who is most likely to pay me that amount?
  3. If #2 doesn’t meet the needs of #1, do I know how long, and what it would take, to get my business there?
  4. Do I know all the options for monetizing my business, including a sale to employees, another entrepreneur or professional acquirers?

If you are a Baby Boomer, unless you are exit planning in a crisis, you risk a discussion in 2025, or 2028, or 2031 that starts with “Well. the coronavirus hit our industry pretty hard, you know.”

There is a network of advisors in the USA and Canada who specialize in a reasonably priced, 90-day planning process for small business owners, and who use a suite of online tools to help you work through all these questions remotely. They can help get you started right now.

For a listing of these advisors, go here.

John F. Dini, CExP, CEPA is an exit planning coach and the President of MPN Incorporated in San Antonio Texas. He is the publisher of Awake at 2 o’clock, and has authored three books on business ownership.
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