The COVID-19 Effect on Business Succession Plans & the Five Things You Can Still Bank On

The COVID-19 Effect on Business Succession Plans & the Five Things You Can Still Bank On

The COVID-19 pandemic has affected how we socialize, shop, create, worship, and educate our children. Once the pandemic eases, some aspects of our lives will return to “normal,” and some will not, including many aspects of how we do business.  

Our focus today is not to explore all those changes but instead, to identify what owners can do—whether their companies are doing well or not so well—to look beyond pandemic-created challenges and see the potential pandemic-created opportunities. Especially as those opportunities relate to business succession plans. 

The Business Challenge 

Few businesses are performing as their owners projected in 2019. Companies are either struggling to meet those projections or blowing through them. The question for companies whose sales and profits have plummeted is: Will they survive? The question for companies that are outperforming their most optimistic projections is: will demand continue after the pandemic?  

In the group of owners whose companies are struggling, some have told us that rather than continue to fight “a losing battle,” they want out. Some of these fear that they could lose more while staying in and others simply don’t want (or have the runway of time necessary) to rebuild their companies. 

Other owners of poorly performing companies are digging in. They feel that they’ve invested too much to throw in the towel now. They know that the value of their companies has fallen so, even if they could sell, they’d sell at what they view as a loss. A subset of the group of owners who want to soldier on suspects that this pandemic has presented them with an opportunity to reform their companies. We’ll talk more about these owners in a moment. 

Is There an Opportunity Buried in Your Haystack? 

In the middle of difficulty lies opportunity.  – Albert Einstein 

We are strong believers that with change—even when it is unwelcome and uncomfortable—comes opportunity. The goal of this article is to help you see opportunity for you and your company in today’s radically changed business environment. We’ll look first at opportunities for owners whose companies are doing poorly and then at those for owners whose companies are doing well. 

Ask yourself these two key questions… 

Hard Times: Get Out or Rebuild? 

If you are in the retail, leisure and hospitality, food service or performing arts industry, or your company serves one of these industries, it is likely that your company is fighting for profitability, if not survival. You may be facing the possibility of bankruptcy at one end of the risk spectrum and a lower business value at the other. (A valuation of your company would be lower than it was at this time last year, simply because valuations rely on historical data to predict future performance.) 

In this situation, you have two big pathways to choose from: Get out or rebuild. If you choose to get out, either immediately or sooner than you planned, a lower valuation will impact your personal financial situation. s. However, if you are financially ready for your Next Adventure and you hope to transition to an “insider” (a family member or an employee), a lower business value may make it possible for your successor who could not have afforded equity when the company had a high value to afford it at the new lower value. 

Had you planned to transfer your business to a successor who could only afford to buy-in over time, a lower business value means that they can purchase equity over less time. Or, if you had planned to incorporate gifting into your transfer of ownership (perhaps to a child), you may be able to transfer a greater percentage of equity via the same gifting strategy. 

If you are an owner who wants to ride out the pandemic and remain active in your business, you have the opportunity to rebuild your business to better reflect the new economy. One of our clients has done that by increasing fourfold the resources it devotes to its nascent, but currently exploding, e-commerce division. Other clients who do not have a division doing so well that it can carry the rest of the business, are recognizing the value of and drawing upon the talent and energy of their most creative employees to pivot into in-demand products and services. To motivate those employees to rejuvenate and grow their companies, these owners are taking advantage of lower business valuations to bring these employees into ownership. Again, lower business value enables successors to buy equity who may have not been able to do so at higher business value.  

Good Times: Change or Business As Usual? 

Some owners find themselves riding the rocket that is the COVID pandemic. Their companies supply in-demand products/services such as hand sanitizer, personal protective equipment, bread machines, prefabricated backyard buildings, fitness equipment, delivery services, coffee/meal subscriptions, etc. Some were producing these products or services before the pandemic, but some have pivoted into them. For example, one of our clients used its well-built supply chain to switch its focus from one type of wholesale customer (doing poorly during the pandemic) to another who has established a niche for itself as a result of the pandemic. 

Again, owners of these successful companies are reacting in one of two ways: ride the rocket as long as possible or transition to successors while taking advantage of the growing values. The pandemic continues to bring challenges to businesses and for those who look closely, it brings new opportunities. 

The rocket-riders know that rockets launch just as quickly as they crash. So, while they scramble to keep up with demand, they are also looking ahead. They know they need talented people who can create success for the long term. These owners may be able to benefit from the low value of others who could be overleveraged or not doing as well. There are high-value assets—such as employees and customer lists—at struggling companies. Today, owners may be able to hire/purchase assets “for a bargain” to inject new energy and new customers into their companies. 

We know what some of you are thinking: “Are you suggesting that I feed my business on the carcasses of others? I’m not a vulture!” 

No, we are not, and you are not. Acquiring a competitor’s business (or specific assets), could be lifeline for that competitor. Your competitor may avoid bankruptcy, merge their business into yours, be able to keep his/her home or start over with a clean slate. None of that would be possible without you. 

Five Things We Know For Sure 

We all pause when we confront the unknown, but whether your company is doing better or worse than ever before, there are at least five “knowns.” 

  1. External and internal conditions and events can change at any time. The pandemic is the latest example of an external event, but other events, such as changes in tax rates, can also work for us or against us. Internally, a key employee could leave or we could experience a health crisis. 
  1. New political leadership brings change. We will have a new president and congress in January of 2021. Regulations related to the minimum wage, family and medical leave and personnel benefits could change. At a minimum, tax experts predict that whether Biden or Trump, Democrat or Republican, capital gains and estate tax rates will change. 
  1. At some point, you will transition your company to a successor you choose or one you do not. The longer your runway between the present and the day you plan to begin your transition out of your company, the more options you have.  
  1. Risk is an unavoidable part of doing business. We all do what we can to minimize it, but every time we hire an employee, launch a product or service, or sign a contract with a new supplier or customer, we take a risk. Today the number of unknowns we face has increased exponentially.  
  1. Even during a pandemic, we cannot allow fear to stop us in our tracks. The only remedy for fear is an objective assessment of both risk and possibilities with a resulting plan of action. 

Yes, as we’ve all heard (and said) thousands of times, we live in challenging times. But challenges come with opportunities. If you’d like to explore opportunities specific to your situation, call us. We’d be happy to brainstorm with you. Reach out at info@TransitionStrategists.com