Owners are taking a strategic look into business succession during COVID-19 pandemic

Knowing the right time to pass down a business is as unique as the whorls on a fingerprint.

In the coronavirus era the path to small business succession and exit planning is lined with planning, purpose, flexibility and careful choices. 

“There is no once size fits all right now,” said Paula Barrett, a partner at RKL LLP, a certified public accounting and wealth management firm in Wyomissing.

Barrett said her firm is currently seeing a lot of succession activity driven in large part by lessons learned about its impact since the global pandemic began in March and the reality about how little control anyone has over unforeseen events.

Beyond coronavirus Barrett said the upcoming presidential election is also impacting decisions about business ownership and transfers, especially for those running family businesses.

“Those folks are seeing the opportunity of being able to transfer without any kind of impact because of the large life-time [tax] exemptions we currently have at $11 million per person,” she said.

Add in any negative impacts because of the virus on the company’s balance sheet and transferring ownership may be a little more cost efficient during this time.

Heavier or more widespread use of technology or the need to become more tech savvy in a short amount of time, especially if the current owner isn’t a digital native, could prompt a business succession strategy. 

“If a company is making a big transition into how it operates and the ‘heir apparent’ is more comfortable with technologies and the [digital] way of working” making the transition sooner could make sense, said Andrew Ward, a professor of management at Lehigh University in Bethlehem. 

Barrett said the unknowns swirling around the virus and response to it, along with election outcomes, market demands and the economy, in general, may be creating more urgency about planning.

She’s been receiving more calls about succession planning and strategies since coronavirus hit, which means business owners are thinking about it and the time it takes to achieve a solid plan. Barrett said it can take more than five years to formulate a succession plan.

She suggested the pandemic may have prompted business owners to take stock, maximize the company’s value, and begin or continue the succession planning process

“What this [pandemic] has shown is the need to plan ahead and prepare because succession and exit takes time. I think people are really seeing how important this is,” Barrett said.

Ward said because coronavirus has had different impacts on different businesses, the same has occurred with business successions.

“When you are making that sort of transition you want stability and a smooth change from one person to the next, [and] I think what you’ll see is that those transitions may be delayed during this time,” Ward said.

For those who are already facing turmoil because of the pandemic, adding in a business transfer might be more than they- or their employees, could handle right now

“It’s not going to help the transition. I think a lot where people were about to start that [succession] transition are more likely to delay it until there is more a sense of normalcy,” Ward said.

He noted there is significant value to passing the baton with the founder or previous owner still engaged during the transition, as well as being in a role during an overlap period. 

“You’ll see this with small or family businesses, but you even see it with the Walt Disney Company transition,” Ward said.

In February The Walt Disney Company CEO Bob Iger announced he was stepping down, effective immediately and overnight Bob Chapek was the new CEO. 

“Chapek came on more quickly than anyone expected, but you’re seeing Iger stay around in an executive chairman role,” Ward said. Iger’s contract runs through December, 2021.

Ward expects this type of scenario – where a former boss or owner continues in some form of transition capacity, to play out across a variety of industry sectors and companies. 

Among the benefits of a slow transition are having access to the talent and history of the company in a founder or long-time owner, as well as keeping an established voice on hand to support the company’s culture and community.

Graham Simmons said there are business owners who may be hesitant to pass over the “keys” to the kingdom because of a massively uncertain future – especially moving into the fourth quarter of 2020 and dealing with coronavirus.

Simmons is co-chair of the business law group and administrative partner at the Pennsylvania office of Norris McLaughlin in Allentown. 

“There are others who hesitate to spend any additional money for consultants [to prepare for business succession right now] and those who can’t pass the business on fast enough,” Simmons said.

He noted enterprise values – the total value of an organization – for many businesses continue to remain unknown during this time. 

“The pandemic has forced people to look at the future differently,” Simmons said.

What’s more government regulations, the fluidity of the economy and rapidly changing public health guidance further fuel risk – and risk aversion to making many dramatic changes.

“When you are transitioning a business – especially to family or an employee succession, you will be paid over time. A good buy/sell agreement will tell you have to transition the ownership, but will also include a funding mechanism,” he said.

How eager will business founders or owners be to take on unsecured debt during a global pandemic?

David Matchett is vice president and wealth strategist for PNC in Bethlehem, and a certified exit planner.

He said while stressful and challenging the current conditions could offer a prime opportunity for small family owned and businesses to shift operations and ownership to the next generation, if they’re ready and willing. 

“For a business succession in the family, this is the optimal time,” Matchett explained.

He noted high exemption protection amounts from federal estate tax – that’s $23.2 million for a husband and wife, along with very low interest rates for borrowing, can be attractive incentives to pass down a business. 

“Under normal conditions you don’t see that too often,” Matchett said.

But not everyone is ready to retire or leave a business they’ve spent a lifetime building.

“I [still] see clients who want to die with their boots on in the business,” Matchett said.

Strong economy and low interest rates expected to bring a good year for mergers and acquisitions

This year is starting with even stronger economic indicators than 2019 and that has experts in mergers and acquisitions confident the industry is poised for sustained activity, despite some concerns about headwinds.

Buyers and investors still have a lot of cash to spend, and sellers that can demonstrate solid financials are in “enviable positions,” said Colin J. Keefe, chair of the mergers and acquisitions group of Fitzpatrick Lentz and Bubba, a law firm based in the Lehigh Valley.

Nationwide, about $2 trillion in private equity remains unspent, creating enormous opportunities into 2020 after what had been a solid 2019, said Robert J. McCormack, of Murphy McCormack Capital Advisors in Lewisburg. McCormack also is chairman of M&A Source, a Georgia-based trade group. At is national convention in the fall, M&A Source members were noting that they expect to see an overall strong 2020, McCormack said.

Going into January, interest rates remained low, the stock markets were hitting new highs and trade deals had been announced with China, Mexico and Canada. An end to the Brexit stalemate in Europe appeared to be near, as well. Still, the possible headwinds will include lingering uncertainty over trade, the US election and the fact that a recession is long overdue, several observers noted, adding that businesses naturally dislike uncertainty.

“There was a lot of concern about a recession in the middle of the year,” said Thomas W. Kerchner, managing director of BMI Mergers and Acquisitions, which has offices in the Lehigh Valley, the Philadelphia region and elsewhere. “But right now, it looks very good. There is a lot of money sloshing around in the system.”

Even if activity slows, it only will be in comparison to what has been strong mergers and acquisitions activity in recent years, he and others said. In a Dec. 30 article, the Wall Street Journal reported that deals reached $3.8 trillion globally through Dec. 27, which made 2019 the fourth best year for activity. That was about 4 percent less than in 2018, the journal reported.

Ryan Hurst is a partner, business consulting services group, with RKL LLP, which has an office in Spring Township in Berks County. While the numbers were off nationally, as well as in eastern Pennsylvania, that is in comparison to what had been banner prior years, Hurst said.

“2017 and 2018 were really strong years, so it is a return to normal,” Hurst said, adding that 2020, like 2019, will be marked by some caution in the industry. Businesses don’t like “confusion and uncertainty,” Hurst said.

“Who knows what is going to come up?” Hurst said.

Steady as she goes

For now, though, he and others said that 2020 is starting with a clearer picture than 2019 in some areas. For one, several people noted, federal tax and regulatory policies aren’t likely to change in 2020, with the effects of the 2017 tax reform settling in and the election 11 months off. The national election will give indications about what to expect in 2021, so people will be watching to see what might happen with policies as the winners become clearer, the experts said. In addition to the strong employment numbers statewide and nationally, consumer confidence remains high, and other economic fundamentals are strong. And unlike the start of 2019, 2020 is seeing trade tensions easing, rather than ratcheting up.

“Last year at this time, I was more cautious that a recession was coming,” said McCormack, who pointed out that interest rates remain low, which helps facilitate deals.

So far, talk of a widespread recession has been muted. For years now, the conventional wisdom has been that the country is long overdue for a correction, most likely a mild one and not of the magnitude of the Great Recession 10 years ago.

“No one really knows,” said Kerchner. “There definitely is going to be a recession at some point. But everything is going well, and I don’t see what could upset it.”

Retain your talent

In some cases, the economy is so strong that low unemployment numbers make it difficult for companies to grow, Kerchner said. In fact, Keefe said, the jobless rates have led some companies to seek deals as ways to expand their workforces.

“It’s hard to hire people. You can expand through acquisitions,” Keefe said, adding that dynamic should be a wake-up call for all employers.

“Keep a tight hold on your talent,” he advised. “Good people are not really replaceable right now.”

Some industries, such as the state hardwood industry, have been in a recession even though the overall state economy is strong, McCormack said. That slowdown has been, in part, due to the trade tensions with China, which had been a major market for hardwoods. Overall, a lot of proposed merger and acquisitions activity has involved construction companies, which means that the supply of deals can be higher than the demand, affecting valuations, he said.

Other experts agreed, including Hurst.

“Construction can be a tough one,” Hurst said, especially if there is not something special that a company offers. One enticing element could include a strong workforce, assuming the buyer has done the research to know that the workers will stay.

“It ultimately matters what the work culture is and whether the workers will stick around,” he cautioned.

Deal opportunities

In Pennsylvania, as well as nationwide, the appetite for deals appears to span across most industries, including health care, technology and manufacturing. Keefe said that companies that have a unique technology are ripe for a deal. Medical-device companies would be an example of businesses that have both a technology and a workforce that can make them attractive. Health care companies that are not heavily regulated also continue to garner interest, several people noted.

The strong economic fundamentals going into 2020 are coinciding with the continuing trend of baby boomers retiring in large numbers. Many of them have no plans for a family member to take over or for an obvious successor. That situation means that they will need to sell. The boomer-led trend will last another eight to 10 years, putting a large number of sellers into the market at a time when there are plenty of well-funded buyers, at least for now.

“Baby boomers are a year closer to retirement than they were last year, so they are a year closer to a sale,” said Andrew Kahn, a shareholder with Concannon, Miller & Co. PC in Bethlehem. However, that doesn’t mean a sale will go through. Deals often fall apart because the seller didn’t properly prepare.

Statistically, about 20 percent of the companies listed for sale actually are sold, Kahn said. Sellers often make mistakes such as not properly getting their books in order or overestimating what their companies are worth.

“Either the seller has crazy ideas about what a business is worth, or they truly are not ready to sell,” he said.

A buyer might be willing to pay a premium if they see the value. Smart buyers will look into every corner, so if the majority of your business is with one customer, it might turn a buyer away, he added. Buyers will look at trends in growth and profitability, and a myriad of other angles, such as whether an acquisition target allows personal perks that can’t be sustained, Kahn said. That means sellers must be pro-active and anticipate such questions before putting a company on the market.

But the sheer numbers involved means that 2020 should be strong for mergers and acquisitions. Kahn noted in the past that there are about 4.5 million privately owned businesses run by baby boomers, with total value of more than $10 trillion. He said in early January that the average age of those business owners is now 64.

Others made similar observations.

“As they age out, it is one of the biggest, if not the biggest, drivers of what we are seeing out there,” Keefe said.

Many owners fail to recognize that the day to sell is coming, eventually, and they need to prepare while there might be a lot of interest and a lot of money in the system, several experts pointed out.

“You are either in control or you are not in control,” McCormack said. “It is better to be in control.”

RKL debuts new services in growth and change management

Professional services and accounting firm RKL LLP, which has an office in Spring Township, introduced new services offered to help companies managed growth and change issues.

Company officials said RKL Next was designed to use the firm’s skills in operations, technology, human capital, data analytics and financial management to help its clients in manage like leadership transitions and acquisitions and other issues in uncertain business times.

“Many of our clients are increasingly feeling left behind given the rapid pace of change in our business environment,” said RKL CEO Edward W. Monborne. “Through RKL Next, we work alongside owners and management teams to uncover new ways of leveling up and advancing toward their goals.”

RKL Next was designed to take advantage of the skills and insights of its employees to help clients align their business objectives through its own talent and organization, leverage data to make better business decisions and streamline accounting practices to focus on growth. It will do this by sending teams into the field to evaluate business operations.

“RKL Next is a unique model for our region,” said Bethany Novis, RKL partner and consulting services group leader. “Instead of reaching up to the national level for this type of expertise at the expense of personalized service, small to mid-sized companies throughout the Mid-Atlantic can now tap into RKL Next for future-ready strategies delivered by a trusted local advisor.”

RKL operates six offices in Pennsylvania, including its location in Spring Township, and has more than 450 employees. The company offers services like accounting, data analytics and risk management.

Experts warn of dangers from alternative payment systems

On a regular basis, the e-commerce director at a Pennsylvania manufacturer used PayPal, as well as other digital and person-to person payment systems to buy equipment and services on behalf of the company.

The convenience of clicking a few buttons – instead of cutting physical checks or going through the hassle of a wire transfer – offered speed and convenience.

There was only one problem: many of the transactions were bogus, and over a two-year period the director funneled about $170,000 into his own bank accounts, according to Jeremy L. Witmer, a senior consultant in the business consulting services group at the professional services firm RKL LLP, which has offices across Central Pennsylvania.

There was “almost no oversight of the e-comm director,” according to Witmer. “His acts weren’t discovered until the company did a budget-to-actual review and found that more than $60,000 was paid to a web developer but never budgeted. The CFO asked for documentation, and realized the paperwork was faked. At that point we were called in.”

The firm worked with the State Police on the case, and the (soon-former) e-commerce director pleaded guilty, served time and had to make restitution.

“One of the reasons he was able to get away with this for so long was that the company didn’t have a procedure to verify and approve new vendors,” added Witmer.

The problem of fraud is a big one, according to a February posting from the information technology company IBM. “Online payment fraud losses from e-commerce, airline ticketing, and money transfer and banking services are expected to reach $48 billion by 2023, more than double the $22 billion in losses estimated for 2018,” noted the report, citing data from Juniper Research. “With the global rise in instant payment schemes, specifically new P2P payments methods, Juniper Research forecasts fraud losses for money transfers increasing by over 20 percent per annum to $10 billion in 2023.”

“We want to live in frictionless, one-click world, but that can bring its own problems,” said Jonathan T. Marks, a partner at the advisory, tax and assurance firm Baker Tilly and member of the forensic team. “When your bank account is linked to an outside payment provider, you need to be aware of what’s going on, and constantly monitor your transactions. Many people don’t bother to set up account alerts [which signal them about a variety of issues, including a transfer of funds above a certain dollar amount]. Even when merchants and individuals utilize two-factor authentication and other safeguards, that only helps to guard against — but won’t necessarily completely prevent — fraud.”

Financial institutions are also doing their part, he added. “If I use my credit card to buy gas in my hometown, and 60 seconds later my ‘card’ is charged for thousands of dollars of purchases in, say, Chicago, my bank may freeze the account. So that’s part of the solution, but there’s no single one-size-fits-all answer. You have to tailor a solution to fit each business and every transaction, because fraudsters are persistent and creative.”

No safety net

Nothing is 100 percent safe, according to Scott Groner, business technologist at the CPA and business consulting firm Concannon Miller in Hanover Township, Northampton County, but businesses and consumers alike can take some precautions, even if they involve tradeoffs.

“Merchants should try to know their customers,” he said. “When possible, request some form of valid identification, even though this may defeat the ease of digital transactions.”

He also has some advice for consumers when it comes to digital wallets, which can let them make in-store purchases by swiping their smartphones or other devices, instead of having to dig out a physical credit card.

“The beauty of using a digital wallet is that it’s not vulnerable to ‘skimmers’ [fraud devices attached to ATMs and other inputs that can swipe credit and debit card information], the way a physical card may be,” he said.

“But beware of using your mobile device on public wi-fi connections, since hackers may then be able to access your digital data,” he added. “Also, set your smartphone to lock after a certain period of time, so if you lose it, a hacker will have a tougher time getting into it. Finally, merchants and consumers alike should check their credit card and other account statements on a frequent basis to try to spot suspicious activity.”

Like freedom, the price of online financial security is eternal vigilance.