Q&A: Transition Opportunities in a COVID-19 World

Ownership transitions and leadership transitions are top-of-mind issues in a normal economy, and COVID-19 has in many ways elevated these concerns and considerations in connection to short-term and long-term transition planning. The following includes key questions regarding issues that specifically impact the construction and real estate industries, as well as DHG responses to each of these questions.

1

What are some key factors that lead to a successful sale of a business?

There are a few very practical factors that can help lead to a successful sale of your business. First, make sure you have a diversified and growing backlog of business. This can help future buyers understand  expectations related to future earnings. Having a reliable management team in place to continue operating the business is also crucial. Finally, you should plan for the preparation of financials, adjustments for earnings before interest, taxes, depreciation and amortization (EBITDA), and be prepared to post the information in an organized fashion to a  data room

2

What is the condition of the current environment for mergers and acquisitions (M&A)?

Requirements for M&A transactions have become increasingly more stringent and focused. There has been positive reception in the market for companies operating within particular niche markets or sectors, having a dominant market share in key geographic areas or possessing other uniquely favorable characteristics. Finding the right buyer is key and structuring the transaction in a way that achieves the right valuation is also critical. In the current environment, now may be a good opportunity to consider a buy-side acquisition strategy to create additional value prior to a sale. An internal management buyout or converting to an Employee Stock Ownership Plan (ESOP) may also be attractive options.

3

What are some potential financial challenges for sellers post-sale?

After selling and transitioning out of their business, sellers may be challenged with budgeting and planning cash flow, including managing liquidity and prioritizing spending. In addition, sellers could potentially experience Sudden Wealth Syndrome, which can cause stress, guilt, fear and isolation as a result of acquiring a substantial amount of wealth after selling their business. Sellers may also have specific family financial needs, so they should take considerable time assessing the financial needs of each family member and carefully plan the transition of wealth. The current market environment is experiencing volatility and uncertainty due to COVID-19; as such, sellers should take this into consideration when working toward a sound transition plan for the future.

4

How does insurance affect my business succession/transition plans?

Business succession planning should include a unique blueprint that takes into account considerations for risk management, tax planning, cash flow and legacy. The efficient tie between planning and insurance is that insurance can provide on-demand tax-favored cash to help with any of the following:

  • Funding buy-sell agreements
  • Paying estate tax
  • Augmenting cash flow in emergencies or retirement
  • Creating a legacy for non-business owner family members

Questions to consider when assessing insurance coverage include:

  • Do I have too little or too much coverage? Is that coverage cost effective?
  • Do I understand my policies, especially the non-guaranteed aspects?
  • Do I understand how my policies may perform under stress?
  • Are my policies structured in a tax effective manner?

5

How does tax planning affect transition opportunities in the current market?

Some companies may find gifting to be an advantageous opportunity in the event that the value of their company has lowered due to the current market, as gifting can impact estate tax obligations. Those who have incorporated trusts into estate planning strategies may find opportunity in freezing values by selling to trusts. Also, the Coronavirus Aid, Relief, and Economic Recovery (CARES) Act, including potential tax consequences of the Paycheck Protection Program (PPP) loan, should be discussed with your tax advisor. Finally, if you plan to transition via strategic acquisition or vertical integration, you may identify opportunities with acquisition targets having a lower company value but would still benefit from such M&A activity, resulting in a win-win for both the buyer and the seller.

Because COVID-19’s impact on the economy, as well as new regulations and tax law changes that have been released (e.g., CARES Act), one of the most crucial elements of a successful transition is identifying opportunities and communicating your plans with your team of advisors. If you have questions about planning your transition, or wish to speak with someone on our team, reach out to us at info@dhg.com.

ABOUT THE AUTHORS

Aprille Bell
Managing Partner, Construction & Real Estate
Aprille.Bell@dhg.com

Aprille Bell
Managing Partner, DHG Construction & Real Estate

Talbot Carter
Vice President/Financial Consultant, DHG Agency

Sarah Paris
Financial Advisor, DHG Wealth Advisors

Sarah Windham
Partner, DHG

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