Lakeland Currents 1212 - Planning for Business Succession
Lakeland. Currents your public affairs program, for north-central Minnesota. Produced, by Lakeland PBS with host ray gildow. Production. Funding from Lakeland currents is made possible by Bemidji regional, airports serving the region when daily flights to Minneapolis st. Paul International Airport, more information available at momiji Airport organ, closed. Captioning, for Lakeland currents is sponsored by, Nisswa, tax service tax. Preparation for, businesses, and individuals, online at, nisswatax.com. Good. Evening everyone and welcome to Lakeland currents, we're happy that you're joining us this evening well. We're going to talk a little bit about business, secession. And, by that I mean if. You're a let's, say you're a small hardware, or store owner in a small rural community and, it could be downtown Duluth, or it could be Minneapolis, too but in. The small communities, when you have a hardware. Say. A true, value store or an a store that's going to be sold or closed it's, a big deal to the community, to lose that asset. And, so we're going to talk about how. Businesses. Can plan to, make that succession. A smooth. One so, many businesses, don't have any idea what, they're going to do when they want, to retire and they just sometimes just close our doors and, so we're gonna try to help companies, who, are involved with that kind of thing or small businesses, how. You plan, to, make that succession, smooth. So, that the operation, can stay in a community, is, that a good, way to summarize it a little bit John hey, I think that's a fantastic summer my guest this evening our john bennett who is an extension educator, with the University of Minnesota the center for community vitality and, we have had staff members on our program over the years from this it's always been really good information and, you, come from Duluth your offices, in coal Kay that's right so you live in Duluth and Bob, Bob palm coast is a vice, president, of finance. And what else Bob business. Development, business development, for the North span group which is a group of consultants, who, work with businesses. On these kinds of issues and I guess you would we can talk a little bit about what your company does beyond, that because I'm sure you do other things right, but. Let's just talk a little bit about well, when we did a program about this a couple years ago we. Basically had a retired. CEO, come. In with one of your faculty. Or one of your staff members and, talk about how they go into a, hardware, store or a lumberyard or whatever and had kind of helped them plan well. Since, that time, that we did that a couple years ago your process, has gotten much more sophisticated much. Broader and, now, what you're treating, it is not just that individual, business. Owners issue but it's an issue for the community at large, so. Maybe just talk a little bit about what we're what we're addressing here John yeah yeah that's right, so, I. My. Center within extension, the Center for community vitality has been doing business, retention, and expansion programming. For geez probably, more than 25. Years across, Minnesota. So for a long time we've been working. With and encouraging, communities, to. Go. Out and touch base with their existing businesses, because as an economic, development strategy, it's, always a better bang for your buck to. Keep. The businesses that you already have you, know rather than just thinking about attracting, new ones so. We've been doing that for a long time, and a, few years back. We. Noticed, that another. Part of extension, that we have. Kind. Of that does more work with agriculture, and farm, business, transitions, they were starting, to see, business. Owners that were not in the agriculture, industry that. Were attending their workshops, because, they wanted to learn more about how to. How. They, could successfully, sell, their business and transition, their business so, we thought that that, was pretty interesting and at, the same time we started to notice that. Economic. Developers, and city managers, from.
Different, Communities, around the state we're telling us to pay our Main Street businesses. That our owners are mostly, baby boomers and a lot of them don't have, a plan to to, retire or plan to transition, or sell their business so. We decided that was, a good opportunity for us to. Do some more research in, this area and that's when we decided to kind, of dive, right in and think. About what that research might look like and. Before we get to that research Bob let's talk a little bit about what your, company does right. At the North span group we do a lot of work in with business development and economic development we're one of those economic. Development organizations, that just. Mentioned, a minute, ago and, we. We saw several, years ago probably going back to about 2010. That. You know the trends out there are, that the. Business owners are getting older the. Baby boomer business, owners are a huge, segment. Of the business community and, a. Lot, of them have done nothing, as far as, planning. Or positioning, their business for the. Next owner and or for succession and, we. View that as an economic, development problem. That should. That business. Not be positioned. To sell and the. Business owner in turn or, the. Areas, of that business owner decide. To just close. The business up and liquidate, it it's. A loss of wealth. Generating, business and a loss of jobs for that community, which are nobody. Wants to see that and, so. We, got involved back. In 2010, more, on the business valuation. Side of things how do you. Know what. Is a particular, business worth how, does that business person, go. About positioning. The. The value of their business is that the value that they need in a retirement, to be able to, transition. That business I know I have a couple friends that have purchased businesses, recently, and, they're, fairly young and it was a challenge, to come up with the capital. To. Make the investment, so, do you help them with that too we do you, know going back to when we got involved with this this was right. You know you're at, the end of the Great Recession a, lot, of businesses had gone, through a tough time the. Value of those businesses, had had dropped off because they've probably, had gone through a couple bad years. Financing. Was tough, to get to get some traditional, financing, and, a lot of business sales. Earlier. In the decade were done strictly, through seller, financing, very, little bank financing, that's, changed, now where the, banks have become a lot more willing to be able to finance the. Transition, of those businesses, and if they have some gaps and, still, need to have a little bit more help and putting, together a financial package. That's. Where our firm gets. Involved and we. Involve other other programs, that are out there other economic, development I know I know, we think often that this just impacts, probably the smaller communities, but you're, both from the Duluth, area and you, both have seen probably what happened when the number of jobs were lost in Duluth correct where the whole population made. A pretty big drastic, drip-tip. Rather. But, that was probably, from larger, organizations. Going, moving. Somewhere or closing down but anytime, these businesses, leave a community, it's a big impact, isn't it. Yes. Absolutely, and one. Piece of data that we learned from the small business development centers is that. 30. Percent of, businesses. That fail fail, because there, was not a successful, transition, or, a successful, succession. To that business so it's. It's, a big deal and, communities. Of all sizes both, urban and rural. I've. Worked, a lot with communities. In some, of these development, areas and I know that I've, always considered the two worst jobs in town would be the Chamber, director or the, economic. Development person, because. There are always so, much pressure on those folks to to get growth I think, you make an interesting point you don't have to spend all your time on growth sometimes you need to spend it on maintaining. What you have and I think we can drive through a lot of rural, communities and, see, a lot of storefronts, that are closed down because, those folks didn't have a plan to keep those in business so, what some of the research Jean, that you got that that's that's kind of recent, yeah. Yeah great well a few, years ago when we started thinking about this we decided to put together an, advisory. Group with, about 10 different organizations. That do work in this field so, the. State Chamber of Commerce was, involved.
And We had some business advisors, and and bankers. And the Minnesota. Valuation. Association. And we put together a. Survey, that was designed at asking. Business, over business. Business owners that had, successfully, transitioned. Over. A certain period of time so, we, sent out surveys. To. Businesses. That had successfully, transitioned, between the, 2008, and 2012, period, and were, still open, a few. Years after that in, 2015. And we, wanted to ask them some questions about, what. Their experience, was like what. Worked well what did not work well what were some of the key challenges and, kind. Of some advice for other, potential. Business owners or communities, that might want to combat, this, issue and some of the findings, that we. Discovered, some, were surprising, and and and, some were not so, the. Way that we kind of approach this was looking, at business transition, from a couple of different, angles. One, is kind. Of the ownership side so that's the. You. Know the legal things you know figuring out a sale price and and financing, working with the banks and then, the other side that, we wanted to learn more about was, more of the leadership so when businesses. Transition. After that transition. Occurs. There. Are, several, things that the, previous, owner can work with the new owner on that, can help make that more successful. You know such as dealing with employee. Issues or cash, flow but. Really just it's kind of like a knowledge. Management. You. Know passing, that along to the next owner some of those things we found out were. Really. Even more important, from the businesses. That that. We heard back from. Bob. You were going to say something here well we're finding that just our, experience, working with businesses, throughout. The region. You. Know that information is pretty much holding true you, know if you've got somebody that's looking at transitioning. A business they're, either going to sell to employees. And/or management, if. It's family owned business they're going to sell to. Family. Members, or. The other alternative, is to sell to an outside. Party and, one that might be aligned with their industry, or their business or may, not have any alignment, with their industry, or business and. You. Know a lot of dynamics, that go on with with each one of those sometimes the the family businesses, are some, of the more complicated ones because they have a lot of a lot of family. Dynamics in there that have to be addressed, but. Some, of the points that Jon just made regarding. Looking, at management who, the employees, are how. Do you groom them how do you train them how do you educate them to be potential. New. Owners down. The road and, these are things that have you have to look at you, know years in advance it's not something you can you, have that you're gonna look at last minute so. If if a person worth considering. Selling, his, or her business, how. Far in advance would, you recommend oh this. Sounds like a lot of years but the but a perfect one would be five, or more years one. Of the reasons for that in is again, educating. If. They're in internal. Potential. For owners is educating, your your, employees or management also. It's going to give you an opportunity as, a business owner if you have a target, sales, price for your business you've. Got time to do some value enhancement, for your business making, some changes, within. The operation. Focusing. More on. Maximizing. That bottom line instead of trying to minimize that bottom line for, you know.
So. The. Center for community, vitality works in all areas, I mean you're working medium. Sized or larger cities to many, many rural areas in. The, rural communities. When you look at populations. Of five hundred three thousand, mm-hmm, what are you mostly looking probably at grocery stores hardware, stores, lumber. Yards you know that's that's, a good question and, so. For, this particular, study we decided, to look at, businesses. Outside of, the, Twin Cities metropolitan, area, so those seven counties down there and we. Surveyed. Communities, that were 7,500. Or less and the majority of those were actually. Communities. With fewer than 5,000. Residents. And we. Also decided, that we were not going to survey. Farms, because that's. Something that we do in another part of the university, and. We decided not to. Survey. Businesses that, were, you. Know eye care. Providers, or chiropractors. Things like that they're a little more specialty. And we also did not survey, businesses. That were passed along, or sold from one family member, to another so we did individual, to individual, sales because, we thought that would help provide. Us with the best data possible. So. That's kind of how we made our decisions, about the, particular businesses, to to, survey and of those that that we heard back the. Number one. Ownership. Change, related. Issue that kind of stood out was the. Financing, piece so. Actually. Working with with the banks a lot of the businesses. That we. We surveyed, said. That they had a lot of trouble with that and the other issue, that we found out was oftentimes, that, business owner has an, unrealistic. Expectation. About what the, value of their business is and, that's. Important, to know for what, Bob had just mentioned part, of the reason you need to start thinking about this five years out is because what. Business, owners might, have kind. Of in their mind or they're thinking about what their business is worth is not, actually. The case and if they start early enough they can start, thinking about some of those changes that need to be made to. Get as much money for their business as they possibly, can and to make sure that it, transitions. Successfully. So. You, have a little different twist than what we talked about a few years ago and that is a more. Community, involvement and talk, a little bit about what what does that mean yeah. Well what. We've sort. Of found is that in, the communities that we work if you want something. To happen it there needs to be a or. It works best if it's a community, based strategy, and there. Weren't many communities, around the state that we're. Doing some things there there, were a couple in. Spring, Valley Minnesota, for example, they had started doing this work over a decade, ago and they, had they. Had received a grant and had. An advisor that, was working with some existing businesses, and had you. Know a great overall strategy, to do that the. City of Barnesville Minnesota also. Started, doing some something, some time ago, but, we, think that it's really important, for a community, to approach this with many different players that can, get involved so it's not just. The economic developers. Or the Chamber's, directors, that are doing this it's really important, to, get, bankers. Involved, and it's important to get the local attorneys. Involved all those, local, service, providers, that can. Really you, know can really serve to be a good, resource, one. Of the things that that we've been learning through our business retention work is that a lot. Of the businesses, that are out there most, of the businesses, that are out there don't. Have a succession, plan already, in place and, they. Might. Not even have, a business plan already in place and if you don't have those things it, kind of makes those next. Steps you. Know. That. Much more difficult to, do so, we're really. Sort of preaching that. You. Know by having, the community get involved they can kind of help get the word out you, know offer workshops and, and resources, and kind of let business owners know that there. Are people out there that want to help help. Solve, this issue and help everyone. Everyone. Be successful. Do. Either of your programs. Help. Identify. Personalities. And. I reason I asked that because I've seen some businesses. Have great. People working in them and they.
Got Sold, to people who didn't have very good people skills and. So. Can. You give advice do you help people that are selling, to, look for the right kind of person I. Think. A little bit you are, you. Really don't have it yeah you know in the end it's it's not. Just the seller what, does the seller wanna sell to, but. I think, what. We see is a lot, of the sellers are driving. Who, that buyer is going to be and a lot of things they want to see is they, want to see their legacy, continue, they want to see the name continue, as a as a good solid business within that within the community he's a good employer. Provides. Good jobs so, I think they're they are trying their best to make sure it's the best owner. Or, buyer, otherwise, that, right, yeah. Yeah and. You know one other thing that we, learned from our research as well is that this leadership transition. Piece, is very important, as well and the. Number one thing that. That. Buyers are looking for is mentorship. And. That can come in the form of the, the previous owner if that person. Is willing, and able to do so but. It can also come from other, business, owners within the community, so, when you're buying a new business in a community, that you. Know you may be new to it's. Important, to kind of find, a way to get plugged into those social networks that are there, in that social capital. You. Know you, know whether it's the local churches, or the Rotary Club or a Kiwanis or whatever that might be it's, important, to have and. This is why you, know from a community perspective the, community can kind of get together and think. About how, can we deliberately. Go out and connect, with these new business owners and try and help them be. Successful as. Possible I. Know. From a seller's, perspective and, you're talking talking. About how how you can bring bring, resources, together to help get, a business. To. Transition. Successfully. We're. Encouraging, a. You know the formation, of an you know of a good solid. Advisory. Team. Support. At the community level, well, it.
Ends Depending, on the community it, it, is, at, the community level but at at the business, level too I mean you're looking for the, right type of accounting. Support, the right type of legal. Support. You. Know do you have bankers, or financers. In, place that are supportive. Of. Financing. The transition, numbers of businesses. You. Know certainly in, you, know we mentioned the Chamber's we're. Working a lot with with, the chamber groups because when they go out and do their business retention, and expansion, visits. To. Their membership they're finding out that the business succession is, is. A, very. Hot. Topic right now be. Concerned with their business, or. They're hearing it from maybe, the bankers that are the are, the. Chamber, members as well that they they're, concerned about some, of their businesses, that aren't positioned. To be able to transition, that business, they. Want to get them hooked up with the expertise, out there to be able to transition, if. I'm a small restaurant owner and, I'm getting ready to sell in two or three years, some. Of the advice somewhere to get is free. But. Some of the technical support out there might have a cost to it how do you would deal with that how do you help them well. That's. Gives, me a chance to mention, that you. Know a lot of those services do cost money when you're going to an. Accountant, or an attorney or, business. Valuation, or appraiser, or. Even somebody that will facilitate that, process to, you those are, services. That are offered at a cost or they're provided, at a at, a cost and. One. Of the things that that's held a lot of business owners back is. The. Perceived cost and. When, I say perceived cost it's probably, it's, it, is an actual cost that maybe, holds them back, our. Organization. That our Span group did approach. Rural. Development this last year for a grant. That would help some. Covers, up to 50% of those costs, well for. A business owner that's in a a rural, community is. A smaller, business under. Under 50 or 50. Employees, and. We're hoping that that's you, know a little carrot that you can hang out there to get some of the, business owners to. You. Know take that leap as far as business, succession, planning. Both. In. Our area and the statistics, nationally, show that there's no barely, a third of the business owners out there that have. Owners, that are getting. Close to retirement have, even, got a formal plan in place so Bob, how would if, a business owner is interested, in that how would they contact you you know they could contact us and. Say hey you know what you. Know what are the steps what do I need to do how. Does how does the grant work you. Know so they kind of there's, a grant that you have and they would have to sort of apply to. See if they would be eligible and then you would decide if they. Should get another like another smaller grant to. Help them out is that kind of how well they would they, would be able to get up to 50% of their of their expenses covered by the. Grant that that. We received and. It would help cover the costs of. Business. Appraisal. Working. Within a CPA, and with, with. An attorney and, we're not looking at bringing somebody, completely new in unless, they actually need to have it. We're. Wanting to make sure that those business owners they may have, part. Of their advisory, team. Group. Of advisers already, in place they're just not utilizing, them right and. That would be their accountant. And an attorney. Yeah. Well I was, gonna say there's you, know there's all kinds of resources around the state as well that business owners can reach out to there's an. Organization. That's it's based out of Cleveland, it's called the exit planning Institute and there's, a Minnesota chapter not for personal life but for business businesses.
And. That. Didn't that Institute, or you know the Minnesota, chapter has a lot of business advisors that are there that help. Businesses. You. Know of all sizes from five, employees or, less to, to more than 100 so that's a good place to go and they, can kind, of help you think about where you know what's a good place to to. Start thinking about I would. Guess if you didn't, have that plan in place and you ended up just closing, that's. Pretty, a pretty, big loss to the look of the owner isn't it because, you're going to end up just selling, off your inventory, and selling. Your buildings and who knows they may become a storage building or something oh and we want to make sure that these owners don't wait, too. Long either, from a perspective of, you, know the baby baby boomer they. Don't think that they're ever they're, gonna they're going to be alive, forever. That's. Not the we. Don't want to see their eggs of plan being vamping. No, stretcher. And then having that, burden being placed on, on their family and to decide what's, gonna be done with the business then yeah. And and, from a community perspective this, is important, because one. Another, thing that we learned through this research is that. About. Two-thirds. Of the businesses that we interviewed, had increased, the number of employees that. That. Are located at the business since they had. Taken, the business owner and about the same percentage had increased, their sales, so. It's not just retaining, the business it's actually, expanding, the you, know their local economic, contribution. As. Well and, in, addition to that from a community perspective, one. Thing that we found out was of the the business owners that that responded. About. A third 33%. Were. People. That were new to the community so I know Ben Winchester, with. My Center has been here before talking, about, newcomers. In in rural Minnesota and what we found out was about 33% either. Bought the business and then, moved to the community or. Vice. Versa tea moved, the community and then and then bought the business so these are people that are new, to the community and you know they're bringing kids to to attend schools and so forth so it, has all, different types of benefits not just economic, it's a real big.
To Buy a business, and. You've, mentioned this a couple of times now that the reason this is becoming so critical is we, have this group of baby, boomers, who are getting ready to exit these businesses, do. You find there's another group of young people willing. To come into most of these businesses and work, the six seven days a week that it takes all. Right I think so yeah, that's encouraged yeah you know you hear about the, maybe. The family-owned businesses, and the changes, from generation, to generation and. You know and the statistics, hold true that you, know, the. Success rate for a family. Business transitioning. Is, declines. With with each generation but, overall. I think there's still there's a lot of good. Potential. Buyers out there dynamic. People smart people, that's. Will be very successful yeah yeah, and and there's some you, know different, approaches that a community can take come. Out kind of a Community Development approach to, encourage, younger people getting into the. You, know the business owner field as well thank, you for jumping on guys it's very very interesting topic and very timely appreciate, it right thank you you've, been watching Lakeland currents, where we're talking about what you're talking about I'm ray gildow so long until next time.