EXIT PLANNING IN UNCERTAIN TIMES

PLANNING IN A TIME OF UNCERTAINTY: HOW COVID-19 IS AFFECTING YOUR EXIT PLAN

BY EIDE BAILLY’S TRANSACTION SERVICES TEAM

During times of market volatility and economic uncertainty, business owners are concerned about how the current or lingering effects of this environment will impact their organizations and their future transition to retirement. In the wake of COVID-19, it is a good idea for business owners to think longer term about their exit plan, whether they need to develop one or reassess their current plan to ensure they are optimally positioned and prepared for a smooth eventual transition.

CREATE OR REVISIT YOUR EXIT PLAN

Your exit plan is an ever-evolving strategy that should constantly be reassessed and modified for changing market dynamics, such as COVID-19. A comprehensive exit plan encompasses every aspect of your transition, including upfront wealth management and retirement planning, preparing your company for a future transition, and evaluating potential exit strategies. If you did have an exit plan in place, here are a few things to consider: • Has the change in the merger and acquisition environment impacted who would be your most likely buyer? • Has your timeline to exit changed? • Is your management team prepared to navigate market volatility? • Have you found yourself with more key customer or vendor reliance?

If you didn’t have an exit plan in place prior to COVID-19, it’s not too late. Now is a great time to see how your organization, and your personal financial situation, will fair under varying conditions. It’s also a great opportunity to model various scenarios and how they will impact your intended outcomes. INTEGRATE IT WITH A WEALTH PLAN

A key to any exit plan is to understand the impact it will have on your overall wealth plan. A wealth plan is a detailed strategy for how to transition your wealth, whether through inheritance, investments, gifting and more. Even in times of uncertainty, such as now, it’s important to consider the impact on your wealth plan. A key aspect of an optimal wealth plan is to identify your objectives and goals. Identify timelines that best fit you, your family, and your business. Understand needed financial resources for your retirement, including future cashflow needs and needed retirement funds that will support your retirement. Preparing for these aspects years in advance of an exit will allow business owners to navigate volatility and uncertainty by focusing on important, controllable variables.

STRATEGIES TO PREPARE FOR EXIT

There is no formula or magic metric that can define the “perfect time” to begin looking for a buyer. Rather, you must look at your own longterm business and personal financial goals. Evaluating these factors will provide a base strategy for your exit plan, which can be adjusted and evaluated in response to external factors like COVID-19. Regardless of timing, preparing your company for a transition is an important step of the exit planning process. Factors to consider while planning for a business sale include: • GAAP Compliance: Clean financial statements are critical to any method of transitioning a business. Early verification that internal bookkeeping is GAAP compliant will ensure a smooth exit process later down the road. Identifying GAAP deviations and understanding their impact prior to transitioning your business will help prevent unfavorable “surprises” during the exit process.

An early understanding of normalized EBITDA and working capital, key metrics evaluated in a transition, will provide insight from the perspective of a potential buyer.

CONFUSED

CONFIDENT

IN TIMES LIKE THESE, IT CAN BE HARD TO SEE THE ROAD AHEAD

A comprehensive exit plan allows you to adapt to prevailing conditions, achieve your long-term business and personal financial goals and give you peace of mind about the future. 32 JUNE 2020 - SEPTEMBER 2020 | LiNK BUSINESS QUARTERLY

• Transition Key Relationships: All exit plan scenarios will evaluate how a business will operate without its founder. Take steps to decrease founder dependency by transitioning key vendor and customer relationships to key employees. Development of a deep management team is an attractive characteristic that will alleviate stress on the business in your transition. • Key Employee Retention: Understand how your workforce will react with a different leader in charge of your company. Take early steps to incentive key employees to stay for the long term by providing transparent and achievable performance goals, that will be honored by you and your replacement.

EXPLORE YOUR OPTIONS

There are several ways to exit your business. These include:

External Sale of the Business

The direct and indirect implications of COVID-19 on the M&A market aren’t perfectly clear at this point, but conditions are broadly expected to slow over the short term. Newly announced acquisitions are anticipated to take a pause as many strategic buyers focus on internal operations and managing cash reserves, while private investors and their lending partners work to figure out how current conditions will impact lending capacity to pursue new deals. If you are beginning to think about a potential sale of your business, now is still a great time to assess how well your business is prepared for your eventual transition. This may include addressing any personnel needs or transitioning key customer relationships to other key team members to ensure the business can operate as usual in your absence. With record levels of investable capital and cash on hand at the end of 2019, both strategic buyers and private equity groups will likely and aggressively re-engage M&A discussions once society returns to normal and economic confidence is restored.

When this happens, and the time feels right to sell your business, you will be glad you addressed these items now instead of waiting until the last minute.

Gift and Estate Planning

Short-term operational disruptions may result in lower company valuations. This provides an opportunity to move assets out of your estate and use less of your exemption. Additionally, it may be beneficial to lower tax obligations to employees, family or sellers when values are lower.

Employee Stock Ownership Plan

An Employee Stock Ownership Plan (ESOP) is a qualified retirement plan for the benefit of employees that invests primarily in employer stock, thus making all employees “owners.” ESOPs are generally exempt from income tax and provide other special benefits due to Congress’ desire to encourage employee ownership, loyalty, and productivity. Similar to financial buyers, ESOP trustees and lenders will likely increase scrutiny of near-term performance.

THE IMPORTANCE OF PLANNING EVEN IN TIMES OF CRISIS

It’s important to continue to plan, even in times of market volatility and uncertainty. A comprehensive exit plan will allow you to adapt to prevailing conditions and achieve your long-term business and personal financial goals, even in the wake of COVID-19.

CONTACT EIDE BAILLY BILLINGS OFFICE

RONALD J. YATES, CPA

Eide Bailly Billings Partner-in-Charge 406.896.2423 RYates@EideBailly.com

DEBBIE POTTER, CPA

Eide Bailly Billings Partner and Tax Department Head 406.896.2498 DPotter@EideBailly.com

Printed with permission by Eide Bailly. This insight originally appeared on EideBailly.com.

ADDITIONAL RELATED AREAS OF EXPERTISE:

•Business Evaluation