Mind Your Business

Mind Y ur Business The Economy, Covid, and Cash Flow

By Yitzchok Saftlas

Every Sunday evening since July 2015, Yitzchok Saftlas, CEO of Bottom Line Marketing Group, hosts 77WABC’s “Mind Your Business” show on America’s leading talk radio station. The show features Fortune 500 CEOs, CMOs, and top business leaders where they share their business knowledge and strategic insights on how to get ahead in today’s corporate world. Since Q2 2017, the 77WABC “Mind Your Business” show has remained in the coveted Nielsen “Top 10” in New York’s highly competitive AM Talk Radio market. Guests have included John Sculley, former CEO of Apple and Pepsi; Dick Schulze, founder and Chairman Emeritus of Best Buy; Beth Comstock, former vice chair of GE; and Captain Sully Sullenberger, among nearly 200 senior-level executives and business celebrities.

TJH will be featuring leading questions and takeaways from Yitzchok’s popular radio show on a bi-monthly basis.

Michael MacIntyre

On a recent 77WABC “Mind Your Business” broadcast, Yitzchok Saftlas (YS) spoke with guests Michael MacIntyre (MM), Investors Bank Head of Business Banking; Joe Orefice (JO), Investors Bank Executive Vice President and Head of Commercial Real Estate; Mark Baran (MB), Principal in the Tax Department at Marks Paneth LLP; and Angela Sadang (AS), Principal in the Advisory Services Group at Marks Paneth LLP.

Yitzchok: Angela, can you explain the term valuation?

AS: It’s really an analytical process. It’s a methodology for determining the monetary worth or the price of an asset, liability, business, company or even a person. It’s conducted by professionals such as myself – it’s neither strictly an art nor a science, but it’s a hybrid of both.

It’s not an exact science in the sense that no precise outcome or number

Joseph Orefice

exists to measure value. It is a science in the sense that it involves math, statistics and economics, and involves logical and analytical reasoning. It’s also an art because it requires skills, knowledge, and experience to apply subjective judgment on the facts. Ultimately, it’s the market that determines the value of a business or an asset. And my role is to reasonably and logically estimate that value.

YS: What kind of activity are you seeing in the market today?

JO: It’s been a wild ride and it’s been a very interesting time for us. We spent a large part of our year working with our existing customers to get them through this interesting time of shutdowns and Covid and all those things. It’s obviously still going on. We’ve spent a big chunk of our time working with our customers to really help them as best we could position for the future. But at the same time, we try to do some new business, too.

Mark Baran

We’re really starting to see that kind of activity. Financings come up, maturities come up, things need to be done. We’ve been trying to work with people during this time to move forward and do new business.

I think activity is starting to pick up, and we are starting to see some real movement for people to get projects going and get new things going.

MB: I am seeing quite a bit of activity right now. I can’t say that it’s a particular trend or a pattern or an exact answer, but no doubt there’s activity. There’s a tightening of finances and gloom and doom because people are seeing certain industries that are no doubt having difficulties. But there is also a pattern of creativity, there’s demand, and there’s interest. And that, quite frankly, is surprising. I’ve always told people that in this world of transactions, particularly small and midsized businesses, if you’re not familiar with it, expect the unexpected. This is an area where we’re in uncharted

Angela Sadang

territory. And Covid has changed the marketplace from my perspective.

YS: Mark, what are you seeing in terms of trends in the M&A market, particularly the small to middle markets?

MB: First, we need to understand where you are in the life cycle. So, if you had a deal pending before Covid hit, there’s a different trend. And interestingly, in that type of trend, people are now showing their hands. For example, we were in the middle of a deal when Covid hit, and we thought that this could fall apart. It turned out they wanted to do the deal even more and sweetened the pot. They were worried, and we had no idea. People are showing their hand, which is interesting.

If you’re contemplating a sale or a purchase, that’s a different story. Now we’re looking at trends where people are spending more attention to terms that they otherwise would not have focused on too much. They are look-

ing at diligence much more carefully, and they’re assessing risk in different ways and looking at creative incentives. Callbacks are coming back now. There’s a lot of that going on. It creates delays, logistical issues. But these are trends that I think are going to be here for a while.

A lot of these issues have always been around. Now they’re just more important than they were before.

YS: Michael, for small businesses, how are banks changing their credit appetite in today’s market?

MM: If you look back over the last five, six months, we’ve essentially been doing nothing but PPP loans and pointing customers to the SBA for all the disaster loans that are available to small businesses. Right now, we have a gap. PPP’s expired and we’re still waiting for guidance from Congress for future phases of PPP. We’re open for lending. We are at a point, though, where we are much more reliant on real time data from the customer as opposed to historically relying upon legacy results or previous results for a small business. We have less certainty in the future about the cash flows of a small business. But if someone wants to buy a truck today, we’re happy to look at that deal and look to finance it. If someone’s looking for a line of credit to help them get through the cash flow cycles that they’re dealing with right now, we’re open to doing that. The change that we’ve seen though, in the last several months, is being much more aware that customers have been severely impacted, severely harmed by this crisis. And we need much more real time data in order to advise a proper credit decision.

YS: Mark, as it applies to M&A, what’s your take on how the upcoming elections will affect that?

MB: The elections are going to be very interesting in terms of how this is going to relate, at least from my perspective and seeing the plans that are out there from both parties. But if there’s a change of administration, there’s clearly going to be a landscape where there’s going to be more regulation and more taxes. I’m not saying that negatively. But it is going to affect decisions. It’s going to affect financing. It’s going to affect the bottom-line figure that a seller will receive post-tax, for example.

So that will have an impact. If the administration stays the same, I still think you’re going to see some tweaks because, with all the stimulus legislation, at some point it needs to be paid for. How that’s going to be done is going to be the subject of debate. But it’s definitely going to impact the M&A transaction environment.

YS: Angela, what opportunities have you been advising your clients in light of Covid-19?

AS: Lower values create a unique planning opportunity. It allows businessowners to transfer a greater portion of their business assets and reduce their taxable estate. There’s a lot of opportunities in the gift and estate planning arena. The recent decline in market valuations is an opportunity to get those lower values, potentially allowing businessowners to gift assets using a lifetime exemption that would have otherwise resulted in a taxable event before the pandemic. Also, there’s this additional uncertainty surrounding the U.S. presidential election and what might happen to estate and gift tax exemption levels, so now may be the best time to do some gifting. With proper planning, the post transfer growth in the assets can potentially escape estate gift and generation skipping transfer taxes. Another economic development also makes transfer tax planning especially beneficial. In the current scenario, interest rates are currently very low, in part because of the government’s efforts to support the economy. I’ve seen a lot of intrafamily transfers, loans to family members. That’s become very popular in the past three months.

I approach each assumption with care. And, you know, one of the keys to many of these strategies is to obtain a supportable valuation, especially when dealing with closely held businesses or fractional interests in the business.

YS: Mark, are there any tips or resources that you would recommend in terms of businesses that accepted PPP funds and are looking to maximize their loan forgiveness?

MB: The tips I have is to make sure you document your reasons for the loan and how you use the loans. I can’t stress that enough – document, document, document. You don’t have to submit all your documentation when you apply for forgiveness. But if you’re audited or something changes, have a record because as time goes on, you’ll forget it. Be patient, too. A lot of

“History proves to us that we’re pretty resilient and things will bounce back pretty well.”

people are understandably eager to get this out of the way and forgiven. (There might be a second round of PPP loans, with Congress discussing things and then expect more). I always tell people, expect the unexpected, expect more. This has been described to me like building an airplane by flying. So, we have a situation here where there’s resources the SBA has on their side, but there’s also resources with your professional advisors and others and even the banks. Everybody has really been helpful and sharing as much as they can.

YS: Are there any specific takeaways you want to share with us?

AS: You know, Covid-19 grabs all the headlines, but it’s not the only major development that will have potential impacts on valuation. The Fed, for instance, is buying up corporate bonds. There’s the upcoming election and low interest rates. And it’s always fascinating to look for opportunities behind the bad news.

MB: Just remember, everything is interrelated. There’s very little we do in transactions that doesn’t involve Angela in our firm. So to the extent that you’re using a creative transaction, maybe a merger of some sort that’s tax-free, a divestiture or something like that, everything depends on valuation. We can’t test a tax-free deal unless we have the right valuation. The interrelationship between everything that we discussed today is going to become more pronounced; it’s there now. It’s going to affect decisions going forward. And I think it remains to be seen how things will turn out in the future. We look forward to working with our clients.

JO: I find myself cautiously optimistic. I know there’s a lot of things in flux, elections and valuations and cash flows and Covid and all these things. I think history proves to us that we’re pretty resilient and things will bounce back pretty well. So, I always approach the day pretty optimistically, and I’m optimistic going forward. I think it’s one of those moments that investors and bankers are great at, which is building relationships and seeing those relationships through the thick and thin that the economy brings to us.

MM: From my perspective, covering small businesses, we remain available to provide advice and counsel. It’s not about a transaction or a product or service. I speak to dozens of customers a week that have questions and are looking for advice and looking for some guidance. You really need to have a good trusted financial adviser, an accountant, or a lawyer who you should be consulting with on a regular basis. You should be evaluating the risks that we are facing or the valuation of your company right now. In talking to your banker and talking to the team that I lead here, our selling point is really just to provide, reliable counsel, reliable advice, and recognizing that we’ve just come through a very traumatizing five months. Businesses have reinvented themselves over the last five or six months. And we are there to help them.