Exit Planning in an Uncertain Economy: Business Growth Opportunities Remain Despite COVID-19 Crisis

As a business owner, exit planning is inevitable. From planning to implementation, exiting a business often takes about 3-5 years, so a comprehensive exit plan is needed to successfully identify and accomplish your exit goals. In a tough economy, however, it may seem like exit planning should slow or come to a standstill. It’s all too easy to let fear of the unknown lead you astray from your goals. But we’re here to guide you toward the opportunities that keep your exit plan a priority, even in an uncertain economy.

Sure, there will be a degree of recalibration needed for exit plans already well underway, but your exit plan need not be abandoned. We encourage business owners to reevaluate their current exit timeline and make adjustments, as necessary. If, for example, you have experienced changes in your business value, investments outside of your business, or other areas of personal or family financial stability, timing adjustments may be needed to maintain a feasible and successful exit. Pushing out the timeline, however, doesn’t mean opportunities to streamline and grow your business aren’t there.

Most business owners are sharply focused on steady cash flow, maintaining operations, and ensuring the health and productivity of their employees. And rightfully so, as these are essential to business success. Using these same elements of focus, we want to take a look at some practices that can ultimately increase the value of your business before its sale or transfer.  

Tighten the purse strings

Ideally, a successful business requires steady cash flow, adequate cash balances, and a sustainable cash conversion cycle for inventory and receivables. While many of the procedures outlined here are prudent in general business operations, there’s no better time to rejuvenate and streamline your business model than the present due to our current economic state.

It’s crucial to eliminate non-essential expenses, or discretionary spending. Review your assets and assess whether anything may be liquidated for cash. Consider (with careful attention to the potential effects on employees and morale) combining roles and/or responsibilities where possible.

Capital additions, such as planned expansions and equipment purchases, should be delayed if possible. For unavoidable acquisitions, look carefully at the cost of financing such equipment in comparison to your expected short-term and long-term return on the investment.

Review and monitor “The Books” (fine-tooth combs recommended)

Preparing projections and cash flow forecasts, and periodically measuring them against your actual cash flow, are critical steps in keeping a close watch on your financial standing. We have created a 13-Week Cash Flow Analysis Worksheet, designed specifically to target the liquidity needs of small businesses and assist them with projecting cash flow, forecasting for deficits, managing shortfalls, assessing working capital and liquidity needs, and determining their ability and need to borrow.

It’s important to closely monitor operating and financial costs, not just sales and revenue. We also encourage businesses, to any extent possible, to maintain and seek flexibility in the terms set for any current and new financial obligations.

Keep tabs on your accounts receivable turnover and your accounts payable. It is best practice to review an aging summary report for both receivables and payables, at least weekly, to take corrective or preventive action when necessary.

Leave no tax or financial relief stone unturned

In your annual tax reviews, both internally and with your CPA team, try to think outside the box. Develop strategies that use losses in a single tax year, and consider the modifications the CARES Act legislation made to charitable deductions and the limitation on business interest. Leverage all available tax reduction devices, such as qualified retirement plans, healthcare plans for all employees, accelerated depreciation options, and various available tax credits. Take a look at our article on certain CARES Act Provisions for Businesses for additional details on certain tax provisions.

Explore all avenues for support at the local, state, federal, and private-sector levels. Just to highlight a few examples, businesses may be eligible for federal relief through the Paycheck Protection Program, Economic Injury Disaster Loans, and/or the Employee Retention Credit. Locally, FAME has a COVID-19 Relief Business Direct Loan Program for Maine businesses affected by the crisis.

They say history repeats itself…

When forecasting and projecting your profit and loss, it’s good practice to establish and budget for a “cash buffer” that will be available in the event of future economic downturn.

Succession plans for key roles and business functions, if not already in place, should be established. Best practice is formal documentation of two successors for each role or function in case of emergency.

Profit & business interruption insurance should be considered, if not already in place. While it’s prudent to consider diversifying your suppliers, certain insurance options are available for contingent business interruption coverage that protects you from income losses due to supply chain issues.

Canvas the neighborhood

While eliminating discretionary spending is advised, there is certainly an art to balancing investments if your business has sufficient cash on hand. Depending on your available funds, you might consider weighing the implementation cost with the projected time savings and revenue increases experienced through using automation and efficiency-promoting software; project management or customer relationship management programs, for example.

If your business was not hit as badly as some, now may be the time to acquire smaller, less adaptable companies struggling to continue. The assets obtained through such an acquisition may provide an alternate way for your business to achieve strategic goals that may have been previously unobtainable.

Smaller scale growth options are available without purchasing a company in its entirety. Explore your competitors. If they are unable to remain in business, there may be options for purchasing customer lists, inventory, or equipment, as well as a chance to acquire experienced staff.

If the sale of your business was already in the works, you may consider suggesting seller financing and flexible payment terms for the sale. Sellers may be willing to consider alternate, less conventional sale structures, as current financing and cash options may be limited.

Customers, vendors, & suppliers (oh my!)

Implementing early pay-off discounts as an incentive for customers to pay full financed amounts may work in your favor. Many businesses are also working a cash-on-delivery system, helping them avoid inventory going out without payments coming in.

It may be time to evaluate the economic yield against the manpower and potential losses experienced with certain customers requiring a high level of human capital and/or services requiring intensive customization.

Vendors and suppliers have taken financial hits as well. They may be inclined to trade in less conventional ways, so inquiries could be made about financing options or discounts for full cash payments if they are in need of cash.

Keep your employees happy, and invoke management team powers

Key employees hold significant responsibility for maintaining (and increasing!) your cash flow, customer and employee relationships, and day-to-day operations. Some buyers won’t even consider purchasing a company without a strong set of key players in place, and many others are willing to pay a heftier sum for a business with key management at the helm throughout and following the transition. Why? Well, good help can be hard to find, and maintaining a team that works in harmony is even harder. With the weight of key management pushing so many value drivers in a successful direction, ultimately, you need them happy and productive to shoulder new responsibilities in your absence, and to receive the highest possible price for your company.

Call upon your management team to encourage employee accountability, production, and morale. It’s important for employees to witness a united acceptance of new policies and procedures by the management team. It’s equally important to keep the lines of communication open. By nature, we fear what we don’t know, and fear and uncertainty can only hurt employee engagement and performance.

Look back… and to the future…

We encourage business owners to pause for a moment and think about your company’s current business model and strategy. In the wake of current events, it may be an opportune time to reevaluate your future business strategy and take a look at whether your company is on track for long-term success. 

Don’t go it alone

Altus Exit Strategies, LLC (Altus) is a wholly-owned subsidiary of Albin, Randall & Bennett (ARB). Our professionals bring the financial consulting and tax expertise of a public accounting firm to the exit planning process. We are certified exit planning advisors (CExP) who understand the tax benefits and potential tax consequences connected to the timing of your exit. Together, with our experience collaborating with lawyers, financial advisors, and other professional advisors on behalf of business owners, we guide business owners and their entire exit team to a successful exit, even in times of economic uncertainty. 

If you’re in the early stages of exit planning, take a moment to examine the areas of your exit plan that need to be addressed using the Altus Exit Strategies Smart Exit Planning: Ready or Not? Assessment

Altus and ARB are committed to keeping our clients equipped with the best resources, services, and guidance. We’re here to help our clients through every stage, whether your business is growing or navigating economic uncertainty. Please contact us to discuss a strategy for exit planning or to recalibrate your existing exit planning objectives. We also encourage you to visit ARB’s COVID-19 Financial Resource and Tax Center for additional information on tax and financial matters.

 

by David Jean, CPA, CCIFP, CExP