How public ESG reporting factors into private deals

ESG, which stands for environmental, social and governance, was once just a reporting methodology designed for socially responsible investing. It’s a form of inclusionary screening, highlighting what investors want to include in their portfolio. This reporting has typically been part of public company disclosures. Now it’s increasingly prevalent in private M&A deals.

“What investors and acquirers are looking for in ESG are companies that embrace environmental, social and governance initiatives — companies that are committed to greater sustainability, greater equity and inclusion and diversity, and better governance,” says Jim Altman, Middle Market Pennsylvania Regional Executive at Huntington Bank.

The exact meaning of each of these ESG categories, however, can differ among buyers and investors, and it’s unclear how these issues distinguish themselves from the typical considerations of M&A due diligence. Still, more private-deal investors and acquirers — both private equity and strategic — are grading companies on their performance in each of these categories, making this something business owners looking sell, exit their business, or take chips off the table must increasingly understand.

Smart Business spoke with Altman about ESG reporting and what private business owners contemplating a transaction should understand.

How did ESG considerations enter the private realm?

The gradual trickle down of ESG reporting from public to private has come in part through greater disclosure at the public-company level. Some of that could be from the recent social movements the U.S. has seen. There’s also greater concern on the part of consumers who increasingly want to do business with companies that are at least moving in the right direction on ESG factors. So disclosures have become a bigger deal, not just in the public but also in the private space as more stakeholders want to align themselves with companies that align with ESG.

How do ESG standards differ from traditional diligence?

It’s not entirely clear how ESG reporting differs from the reporting typically requested during the standard due diligence that occurs when an owner sells his or her business. For many, these are metrics that have been considered for a long time as part of a deal. It’s not often that a buyer is willing to take on a business that is detrimental to the environment, that doesn’t consider a variety of stakeholders in everything it does, or that isn’t well-governed.

There may be deals that could largely be driven by ESG factors, while others may only take ESG into consideration. That means some buyers firms could require a level of ESG standing in order to consider a company within the specific industry niche they target. Others may be looking to acquire businesses that are going to help them improve their overall ESG standing. And still others might look for acquisitions that have quality business fundamentals that fit their portfolio that may incidentally have some great ESG factors associated with it as well.

What should sellers know?

For sellers, it comes down to situational awareness. It means understanding the ESG trend within their industry as well as the industry’s leading ESG companies. In a world where there’s no clear definition of what ESG means, a relative definition is meaningful. Industry standards, then, can be a good gauge — and, for those trying to be a leader in the ESG space, it can help define goals.

Potential sellers will want to look at their business and attempt to gauge their environmental, social and governance standing relative to the industry. But keep in mind that ambiguity means ESG standards will largely be defined by the potential buyers who likely have their own metrics. Research the potential industry factors to be in a better position to address questions from potential acquirers.

Understanding how ESG will impact a sale or liquidity event requires further identification, possibly education, but definitely a conversation. ESG in the private M&A space has yet to be clearly defined. But what is clear is that more and more buyers are concerned about a company’s ESG profile. Sellers, then, need to understand acquirers’ value stream in order to maximize value in a transaction.

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Business leaders must stay flexible when redefining their workplace

Change will be the only certainty in the next few years. While there are external challenges companies must contend with, some changes will be driven by employees as they and their employers settle into new work arrangements.

“The work environment is likely to undergo drastic changes,” says Kurt Kappa, chief lending officer at First Federal Lakewood. “That will require an efficient and flexible leadership team that can quickly direct important changes the organization may need to make.”

Smart Business spoke with Kappa about how recent events are beginning to shape a new internal look at many Northeast Ohio offices.

How have area businesses adapted to remote work?

Employees who are headed back to the office are likely going to see a different work environment. Many offices are opting for a hybrid approach — employees will work some days from home and others in the office — so not everyone will have a dedicated desk. Instead, many offices will utilize a hoteling approach, with workspaces available to whoever is in the office at the time.

For some companies, the introduction of a work-from-home option has become a recruitment tool. With this comes the challenge of adapting a new onboarding process that can help smoothly transition new employees. It may not be enough to send a new employee their laptop and expect them to figure it out. The process should be made more personal and welcoming, otherwise new employees may not feel they are a part of the team and could look elsewhere for another opportunity.

Working from home has also introduced tradeoffs. For instance, employee hours aren’t just 9-to-5 anymore. Some are working 12 or more hours, or at least are checking communications well beyond office hours because remote technologies have given employees around-the-clock access. However, those technologies have also helped employees manage their lives during working hours, running errands when they’d otherwise be at their desks and getting back to projects when they’re done. Companies are going to need to determine how to foster a positive work/life balance that doesn’t burn out employees, but also ensures clients are receiving the same level of customer service.

How have leaders adapted to these changes?

Communication technology has enabled leaders to stay connected and engaged with remote employees in myriad ways. Leaders are able to check in with their employees or meet with them virtually at more convenient times, keeping employees engaged and in the know. Managers who are accustomed to in-person interaction with their teams, however, may have to adjust their management style. One way to help this adjustment could be offering education and training on managing virtual teams.

Hybrid work arrangements can open a company’s pool of candidates. Pre-COVID, if a job required five days in the office, the pool of candidates would be limited by travel time. Making a position remote, full-time or even part-time, can open the opportunity to a larger selection of candidates. But managers should be aware other companies may use this option to pull talent away from their organization, which is why they should stay engaged with their teams.

How has planning changed under these circumstances?

The rise of the COVID Delta variant has renewed the uncertainty companies faced in the previous year, which has complicated planning. To get through this, it may be valuable for companies to have an alternative or flexible plan to ensure productivity through any disruption the market may face. Talk through what-if scenarios, strategies to handle rough waters, and what might be needed from a banking partner to get through those challenges.

Companies should continue to expect the unexpected. If there is one thing to take away from the past two years, it’s the need for flexibility and understanding. When something works, share it with everybody so all can be successful. Don’t fight change. Embrace it. This is the ‘new normal.’ Business leaders must be both nimble and flexible as they find the best way to move their organizations forward in these new realities.

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Increase in cyberattacks requires greater diligence in cybersecurity

There’s been a continued increase in cyberthreats since the pandemic began. Not only has the threat volume increased, but the threats are also becoming more sophisticated.

“Executives really need to pay attention to cybersecurity,” says Jim Altman, Middle Market Pennsylvania Regional Executive at Huntington Bank. “Too many are playing the odds that they’re unlikely to be attacked. But unfortunately, with the increasing threats, those odds are against them.”

Smart Business spoke with Altman about the cyberthreat environment and strategies that can help insulate companies from them.

How have cyberthreats evolved?

Bad actors are now prioritizing scams that enable them to monetize a breach as fast as they can, such as through payment-related scams that lead to money, preferably in the form of cryptocurrency, getting to them as quickly as possible.

But speed isn’t always a characteristic. For instance, these criminals are increasingly stalking targets, monitoring a business after they penetrate the company’s email server, reading emails and searching for the right opportunity to capitalize on their position.

Ransomware threats to businesses big and small have also increased. These threats have evolved from just taking a company’s data hostage and demanding payment to release it, to exfiltrating emails and blackmailing companies with hush money and name-and-shame scams.

While frequency and sophistication are improving, they’re still getting in through the same vulnerabilities. They’re exploiting poor passwords, unpatched systems, and holes in companies’ remote desktop protocol and server message block, both of which can be successfully attacked when not removed or at least configured securely.

How has remote work affected cybersecurity?

Having a remote workforce has broadened companies’ attack surface — all the potential vulnerabilities across a company’s entire public-facing network — to now include the homes of their employees. Those home networks have weak spots, which is why it’s important that companies account for those weaknesses as they plan their cybersecurity.

Much of that is basic: keeping strong passwords and ensuring employees regularly patch their home devices. However, one of the challenges in this area for companies is knowing what they can dictate to employees regarding their home cybersecurity and what they can’t, as well as whether they should or shouldn’t scan their employees’ networks. So many companies are emphasizing user awareness and education to ensure employees are aware of the types of scams that are out there, what they might look like, how they work and how to not fall victim. Employees, whether at home or in the office, are a company’s first line of defense against many of these threats. So, it’s wise to spend time and effort making sure users of the system are aware and educated on the threats and the ways to neutralize or mitigate them.

How can companies learn about their vulnerabilities?

Companies should start off with an assessment of their IT infrastructure to determine their dependency on certain technologies — point-of-sale systems, smartphones, etc. — to discover which of them are business-critical, then put together a plan on how best to secure those. It’s always vitally important to identify and protect sensitive personal information, such as bank account and health information.

Once the systems and information are identified, companies should test their resiliency to attackshrough tabletop exercises that are as real as they can be. Follow that up with an independent security audit that includes a vulnerability scan and attack-surface mapping.

Companies should also look closely at what information is publicly posted about key people within the company, such as on social media or their own website. It can be used by attackers in phishing expeditions.

It also may make sense to consider cyber liability insurance. These policies are not cookie cutter, so work with a professional who can find a plan that offers the needed coverage.

These cyberthreats are a multi-billion-dollar problem. No business is too small to be attacked, so every company needs to protect itself.

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What to consider before selling, exiting your company

All business owners eventually face the tough, unavoidable task of deciding how to transition out of their company.

“Exiting a business is a major step that requires years of preparation to execute in a way that leaves owners confident with the future legacy of the company they have built over many years and with enough income to carry them through the next stage of life,” says Jim Altman, middle market Pennsylvania regional executive at Huntington Bank.

He says making the best decision requires seeking advice from those with different points of view on the best strategy, rather than relying on emotions to guide the decision — a fault of many in the position. But the key is to evaluate the objectives that matter most for owners and their families, and to prioritize a plan accordingly.

Smart Business spoke with Altman about exit planning, and options available to owners once a liquidity event occurs and is complete.

What are the more common ways in which business owners exit their companies?

For owners who have family members working in the business who are experienced and qualified to run the company, it’s logical, as one viable option, to transfer the business to them as part of a generational transfer. But sometimes emotions tied to family supersede making the best business decision, and an owner may decide to transfer ownership to a family member who isn’t ready. That decision often puts the company’s future in doubt.

Selling to an independent party offers one attractive option to consider and the most often used for owners to seek a competitive bid and maximize their return. This also allows the seller to receive immediate funds after a sale if no seller note is involved.

Another option is to sell the company to employees under an employee stock ownership program. After tax considerations, it could be one of the most lucrative choices for owners and most favorable to employees. It also creates an opportunity for family to have an ownership stake in the business while the owner can continue to draw money out of the company over time in the form of a seller note or ongoing management fee.

The main thrust for owners is to understand their priorities. It could be important to some owners that family stays attached to the business. Other times, owners could prioritize getting the most money they will use to fund retirement or their next investment. All that matters is that owners consider what is in their best interest and have a plan to achieve it.

Who should be part of the discussion as business owners consider their exit strategy?

There should be at least a trio of people involved: an accountant, legal adviser and banker. All three bring slightly different, but very valuable, perspectives.

Additionally, exiting owners should seek opinions from other people in their network who have sold companies and ask them how they came to their decisions, what happened and whether they’d do anything different. Even if the choice is clear, it’s still a good exercise to understand the pros and cons of each option. This is likely the only time business owners will sell their company, so it’s critical to gather as much information as possible during the process.

What should business owners consider about what happens after the sale event?

Owners should consider their next-stage investment strategy while they put together an exit plan. Too many owners don’t consider that. A full financial plan can help determine the best investment strategy and it will account for the individual’s priorities — whether it’s an immediate return so there’s money to spend on living in the moment, or having money to pass to the next generation.

There will come a time when owners can no longer run their business. Start planning the exit well ahead of that time. Consider the succession of the business and what to do with the proceeds. Revisit the exit plan annually and make adjustments when circumstances change. Seek out the opinions of many people, especially those who have sold their companies, and don’t let emotion trump best judgment for all in the long run.

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Customer trends require technology to leverage

Even in a world dominated by digital technologies, some companies still hesitate to adopt tools that could take their business to the next level. That’s often preventing businesses from engaging in developing customer trends, most of which increasingly rely on digital technologies to leverage.

Smart Business spoke with Jim Altman, Middle Market Pennsylvania Regional Executive at Huntington Bank, about some burgeoning digital trends, as well as strategies to take advantage of them.

What digital transformation trends are taking hold?

Companies today are using personalization to differentiate customer experiences. The experiences customers want differ based on who they are and what they need. With greater personalization and customization, companies can segment their approach so that narrower customer segments get catered products, experiences and services.

Unlocking the collected customer data companies hold goes a long way to understanding the uniqueness that a business can provide its customers. Every company collects a great deal of customer data, but many don’t use that data to drive experiences. It’s important that companies learn to analyze the data that they capture, in part so they can drive more personalized experiences.

Another trend has companies creating ecosystems that serve as a platform for broader interaction, either between a company and its customers, or with customers and other companies. Companies are starting to figure out who they need to partner with — often because those partners work outside the company’s first line of expertise — to provide value to their customers, in part by offering multiple services in one place.

Why might businesses hesitate to adopt newer technologies?

Often business leaders, when presented with a new technology, aren’t eager to employ it. They may understand that the tool offers a more efficient way to perform a task, but they resist, instead relying on the way they’ve always done it because, in their mind, it’s easier.

Additionally, as more applications are based in the cloud, some companies avoid using them because they are uncomfortable relying on cloud services. That’s typically out of concern for security, as some companies believe the cloud is not as secure as software hosted on on-premise servers. While this might seem to them like a prudent risk mitigation strategy, it often means the company misses out on opportunities to save costs through increased efficiencies, or to better connect with customers.

Overcoming that requires educating leadership about the pros and cons of cloud-based applications, making communication key. It takes working with someone who is able to explain the applications, how they work, and how to establish procedures that mitigate as much risk as possible.

Once the benefits and risks are clearly communicated, businesses should start small. For instance, use one cloud application to begin with and work into more as the organization gets more comfortable. Companies tend to think they need to move all applications to the cloud at once. But starting small can help the initiative gain credibility at all levels of the business, which instills confidence and helps the organization move to the next stage. The process can begin by creating a transition plan that identifies specific applications to move to the cloud one at a time. Once most people are comfortable, it can really take off from there.

How can companies mitigate technology risks?

A lot of risk can be mitigated by working with external partners. For example, there are a lot of fintechs that have created niche businesses that can help companies in very specific areas. For companies facing a risk that’s outside their comfort zone, partnering with one of these up-and-coming companies that have mastered a specific functionality where that risk is found can help mitigate security concerns while connecting with valuable expertise.

Look for ways to partner with entities that have expertise and have already assumed certain risks. There are so many businesses that specialize in certain areas that companies often don’t need to develop products, software or procedures internally because specialized partners can do it quicker and with less risk.

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Is your business ready for the Great Recovery?

This year could be the year of the Great Recovery as industries battle back from a tough 2020. There are big earnings growth expectations in the areas of consumer discretionary spending, energy, financials, industrial, and basic material.

However, while the recovery is in motion, businesses are facing pressures in the areas of supply constraints, elevated input costs and labor shortages. How they deal with this margin pressure will reflect on their 2021 earnings statements, and beyond.

Smart Business spoke with Jim Altman, Middle Market Pennsylvania Regional Executive at Huntington Bank, about the macro-economic factors businesses should be watching as they work through what should be a recovery year.

What’s driving inflation concerns?

The components to inflation are commodities, wages and owners’ equivalent rent. Wages and real estate have been fairly well-behaved, maybe slightly elevated. But the reason for this spike in inflation is because commodity indexes are up 66 percent over the past 12 months.

The Federal Reserve thinks this spike in inflation will be transitory, but that’s not necessarily the consensus view. Companies have pricing power and keep raising prices, and wages are going up at the low end, which also could continue. Together, these factors have the potential of making inflation stickier than the Fed thinks it will be.

The Fed has also expressed that this inflation can be attributed to the reopening of the economy, causing supply chain and labor concerns — labor not being at the right place at the right time. The sense is they think once companies sort out those supply chain issues and labor gets back to where it needs to be, which they expect will be by the fall, inflation will move noticeably lower, back to the 3 percent range from the current 6 percent range.

What’s happening with commodities and labor?

Most businesses are buying additional supplies of the commodities than they use — buying three months’ worth rather than one. That’s a normal reaction to inflation, which at the moment is very broad-based. Many continue to wonder when prices will come down enough that businesses stop hoarding.

Part of the labor shortage can be attributed to a mismatch between the skills needed and the skills workers in the market have. This is especially prevalent in the goods-producing industries where U.S. consumers have continued to spend in robust amounts.

The focus of labor is now in the service industries as they reopen. Many former service-sector employees moved to the goods sector over the past year and may not return. That’s why many companies in the reawakening service industries find themselves in a position in which they need to find machines to replace the shortage of labor.

Something else to watch, the Bureau of Labor Statistics’ June JOLTS found that more than 3.9 million employees voluntarily quit their jobs in April. This is, by far, the largest number for this data series started in 2000. So now not only do companies have to spend resources to recruit, they’ve got to spend resources to retain.

What should businesses discuss with their bankers?

Businesses are keeping a close eye on their revenue versus margin. Revenues generally are increasing now, but margins are tightening because of input costs, supply constraints and labor shortages. Much of the conversation is around whether revenue increases are offsetting the margin increase and how long that can be sustained.

Businesses also want to know if their balance sheet is in the right place now that they’re on the other side of the pandemic. They should look to take advantage of low interest rates and lock them in, then look ahead to ensure they have enough cash flow to cover the potentially increased level of debt.

There is a lot to be optimistic about. But margin pressures are enough of a concern that businesses should talk with their banker about all three financial statements — earnings, cash flow and balance sheet — to ensure they’ve got strategies in place to profitably grow over the coming years.

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Life insurance as a risk management vehicle to preserve company value

The role of life insurance as a financial protection policy for families is well understood. Life insurance as a risk management tool designed to protect the value of the business, however, might not be as well known.

A company’s value, especially in small and mid-sized companies, can be tied to the owner or a single executive and their ability to manage the business. That makes protecting the business from their sudden demise or inability to work critical; otherwise, the company can’t continue to provide for the people who have come to rely on it.

“Small and mid-sized companies need a mechanism that helps them deal with the death or disability of shareholders and key individuals, both of which are foundational to the company’s ability to perform and maintain company value,” says Jim Altman, Middle Market Pennsylvania Regional Executive at Huntington Bank.

Smart Business spoke with Altman about life insurance, and how it can preserve company value in the event of the unexpected loss of a key individual.

Why is life insurance important for companies?

Business owners and key executives are a wealth of information in their organizations. But the size of their organization typically limits the size and depth of the management team, meaning there are fewer people with whom skills and organizational knowledge can be shared. That compartmentalization creates risk in a company. Life insurance, in this scenario, would serve as a safety net, replacing the monetary value of what that key person brings to the company while giving the company time to adjust and replace the person in the event he or she is unexpectedly lost.

Another common protective application of life insurance is in situations involving multiple shareholders. In the event that one shareholder dies, life insurance becomes a funding mechanism for the remaining ownership to purchase the deceased partner’s shares. Without this protection, the existing shareholders or the company may be forced to buy the shares with their own cash, depleting valuable liquidity unnecessarily.

Life insurance is also useful for risk mitigation. In some instances, a bank may require a company to have an insurance policy in place to cover the value of a loan to ensure it gets repaid if a critical member of the business passes away. That requirement is more common in early stage companies that don’t otherwise have the collateral to cover a loan.

In what ways can a corporate life insurance policy benefit larger companies?

The application of life insurance in a larger company is really more about the creation of an alternate funding mechanism. Businesses are looking for tools to attract, retain and reward key executives. One method is to set up nonqualified deferred compensation plans that trade enhanced retirement benefits for an executive’s commitment to the organization for a set number of years. A life insurance policy can be a method of funding that long-term obligation. This approach is appealing because it’s balance-sheet neutral and also offers a tax benefit.

Corporate-owned life insurance can be bought for a set number of people with no medical underwriting. Corporations also like that it doesn’t have any surrender charges.

What is important for companies to consider as they design people-centered risk management strategies?

Companies should work to identify and understand their most significant risks. It’s important that business owners take time to consider what could diminish the value of the business. To that end, it’s critical to determine who are the people driving operations and what is being done to protect the business should they become unavailable for whatever reason.

Organizations that have multiple shareholders should review the financial obligations that would arise in the event of the death of a shareholder, specifically whether any existing insurance is structured in a way that provides the remaining shareholders or the company with the cash to buy those shares.

It can be a hard discussion to have, but the company’s risk position in this regard should at least be reviewed every three to five years, or whenever there is a significant change to the business.

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Should your 401(k) have socially responsible investment options?

The meaning of the term socially responsible investing (SRI) continues to evolve as 401(k) plan participants look to align their investment portfolio with their values. More conversations around environmental, social and governance investing (ESG) are happening. And that’s coming not just from the youngest generational demographics in the workforce but from all generations.

“Interest in ESG investing is broad,” says Jim Altman, Middle Market Pennsylvania Regional Executive at Huntington Bank. “Plan participants of all ages are asking more questions about how companies behave, their impact and their intentions.”

Smart Business spoke with Altman about socially responsible investing and what employer plan sponsors should know.

What is socially responsible investing?

SRI had typically been concerned with a couple things. One is negative screening, something that’s most common with faith-based organizations — they might decide they won’t invest in companies that deal in tobacco, alcohol or firearms, for instance. The other dealt with environmental concerns and is what most people think about when they think about SRI. But environmental concerns don’t just mean solar panels and windmills. SRI now also includes environmental, social and governance investing (ESG), which puts the focus on those elements, though each area of interest can mean something different to each investor.

What should employers know?

While some employer plan sponsors might be eager to include ESG options in the portfolio to capture the interest of socially conscientious investors, there is good reason to approach the initiative with caution. Adding ESG options to a plan could signal to some that the employer’s belief system is showing itself in that decision, and that has ramifications. Plan sponsors that constrict investments to only ESG options could find themselves the target of criticism by plan participants if the investments are seen as politicized or impinging on someone’s religious views.

The best approach is to think in terms of complementary strategies. Don’t get rid of a fund in a lineup just to add an ESG option. Instead, introduce ESGs as new offerings that complement the existing plan.

It’s also a good idea to have an open conversation among stakeholders about changes to the plan rather than leadership making the sole decisions. Be collaborative and document the process to defend the position that’s reached regarding ESGs.

How might ESG investment options affect plan performance or participation?

There tends to be a negative connotation of how ESGs affect plan performance, mainly because of embedded SRI ideas that, at their extreme, completely exclude certain industries, such as fossil fuels. Adhering to such a strict portfolio could lead to underperformance. However, as ESG ideas have progressed, it’s less about excluding industries or companies and more about considering the direction of those businesses. For example, a fossil fuel company might pump oil but its R&D for wind, solar and other sustainable sources of energy are on the cutting edge.

Participation in employer-sponsored plans hasn’t shown a dropoff when a plan lacks ESG offerings. Part of that has to do with the fact that most plan participants use the default vehicles — target-date funds for example — when they enroll in a 401(k).

How have asset managers adjusted their plan offerings to accommodate socially responsible investing?

Asset managers that sponsor 401(k) plans are becoming more ESG-minded. Some are integrating ESG options into all funds almost by default. There could soon be ESG-dedicated strategies as well as plans in which ESG options are integrated with more mainstream options. Increasingly, the demand for ESG is there from a participation standpoint, but not all asset managers have brought those options into their plans.

ESG investing is a growing and worthwhile discipline in investment management. Employers shouldn’t be afraid to tread into this area, but should do their research before acting.

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COVID highlights resilience, creativity of small businesses

America’s small businesses have been particularly hard hit by COVID, the impact of which has been unprecedented in the sector. Early statistics from the National Bureau of Economic Research are showing that as many 22 percent of small businesses have closed.

“The average small business doesn’t have a rainy day fund,” says Jim Altman, Middle Market Pennsylvania Regional Executive at Huntington Bank. “They don’t have a tremendous amount of liquidity to fall back on in the event of an emergency.”

But as we enter what seems to be the final innings of the pandemic, small businesses have also proven their resilience through creative pivots and leveraging community resources. And there’s some speculation that there could be a post-COVID boost in small business creation.

Smart Business spoke with Altman about small business survival tactics and how the COVID disruption could lay the groundwork for future ventures.

How have small businesses pivoted to stay afloat?

Small businesses have had to focus on client preference in order to keep their heads above water. A good example of this has been restaurants and grocery stores offering pick-up or delivery services so that they could fulfill orders for customers concerned about in-store shopping and dining.

A lot of small businesses have looked at ways to get their message out with social media, and have leveraged digital options to keep business flowing. Restaurants, for example, have turned to their websites to highlight their offerings, and many have used smartphone apps to arrange for curbside pickup and even touchless payment.

There’s been a significant acceleration in digital migration during the pandemic by many businesses. It will be interesting to see which digital changes small businesses keep around well after the virus is contained.

What resources are available to help minority-owned businesses and startups?

A good place to start is the U.S. Small Business Administration. The federal government provides a fantastic startup process for just about any venture.

Some banks might have programs focused on minority-owned small businesses, as well as those owned by women and veterans. Those could include access to capital, and education and financial tools for small businesses and startups that could help with the creation of a business plan and generating cash flow projections.

There are also local nonprofits that can help. For example, in Pittsburgh, there is the Urban and Community Entrepreneurship Program at the University of Pittsburgh, the Center for Women’s Entrepreneur at Chatham University, the Pittsburgh Technology Council, and the African-American Chamber of Commerce of Western Pennsylvania.

What should someone looking to start a small business today consider?

Now is a good time to start a small business as long as it’s done correctly. That means taking the time to research — understand the market, demand potential, competitive landscape, and how that product or service will be delivered while COVID is still a factor. It’s also important to write a strong business plan and find the right legal and accounting advice.
Another critical component of a successful launch is funding. Entrepreneurs should take time to interview banks, and possibly look for investors or crowd funding opportunities. All of this should be done before a marketing plan is developed and the business is opened.

While the COVID crisis over the last year has made operating difficult, it’s also created opportunities. Many small businesses are getting their start during this challenging time. In some cases, people have used this disruption to consider what’s really important, what drives them, what they’re passionate about, and many will start businesses that not only fulfill them personally, but meet needs within the community that were uncovered during the pandemic. These gaps can be filled by a small business owner who can leverage the support systems throughout their community to help get that dream started and really make a difference.

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Why 2021 might be the year to sell your business

The pandemic-led market disruption will require many business owners to expend a lot of time and effort to restore, resize or even reinvent their business into order to stay competitive. That’s led some to wonder whether they want to go through that — especially those who may have just righted the ship after the difficulties presented by the Great Recession. And more practically, they may be wondering if they have the capital necessary to make that transformation.

Generally, however, valuations have gone up for those companies that have been able to weather the COVID storm. Buyers are increasingly knocking on owners’ doors, offering some pretty favorable deal terms. That creates the potential for a big year for those who work smart ahead of a sale process to put their business in the best light.

“The M&A world has gotten much more competitive on the buyer side,” says Jim Altman, Middle Market Pennsylvania Regional Executive at Huntington Bank. “There are many more buyers out there than there ever have been and a lot of cash on the sidelines looking to get in on the action. Buyers are looking to invest in quality companies, and that gives sellers a lot of opportunity, and leverage, to negotiate a deal.”

Smart Business spoke with Altman about the 2021 M&A environment and why this year may (or may not) be a good year to sell a business.

How might taxes and other factors affect a sale decision this year?

There is a sense from some that there’s probably going to be some changes in the tax law in the near future. If the Biden Administration changes the capital gains rate at the highest bracket, that could affect those who are selling a business in a significant way, and that’s creating uncertainty. Sellers are able to get a very favorable capital gains treatment rate — a business sold today will often be impacted by a 20 percent tax burden. If the tax laws change in the way that some expect, the burden might be 39.6 percent. That difference is driving some owners to work to take advantage of the current tax rates to avoid what could become an additional 20 percent hit to their post-transaction gains.

There are also other factors weighing on the sale decision. Businesses are facing the possibility of a $15 an hour minimum wage, technology replacement costs, and investments to improve their digital presence. That might lead some to find a partner — possibly in the form of a financial buyer — to help offset those costs or lead a transformation.

There’s also the demographics to consider. Many business owners may be reaching a pivot point in their life where they’d rather take all or some of their chips off the table and either de-risk or move into their post-business life.

Who should not sell right now?

People who are still passionate about running their business probably shouldn’t sell. Also, companies that had an unfortunate drop in their valuation could now be in a position where the sale price is going to be affected by circumstances beyond owners’ control. In those cases, it’s likely better to weather the storm a little bit and not give up a loss in value that could be recuperated when conditions become more favorable.

What else should business owners consider ahead of a sale?

The decision to sell is both personal and opportunistic. But planning is key because there are steps any business owner can take to improve their company’s value.

Before reaching the point of fielding offers from potential buyers, business owners should get help from experienced M&A advisers who can make important improvements that better position the business for a sale. It’s too late once buyers have been engaged, and it’s far too late after letters of intent have been signed. Very simple changes could add substantial dollars to a business sale.

Any owner considering whether or not it makes sense to sell should engage good advisers to have that conversation and evaluate the opportunity as thoroughly as possible.

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