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Community Strategies for Businesses in Transition

Community Strategies for Businesses in Transition. Presented to: Community Development Society 2/23/01 By Marilyn Schlake, Program Coordinator Nebraska EDGE Program Center for Applied Rural Innovation, UNL. Community Development Strategies .

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Community Strategies for Businesses in Transition

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  1. Community Strategies for Businesses in Transition Presented to: Community Development Society 2/23/01 By Marilyn Schlake, Program Coordinator Nebraska EDGE Program Center for Applied Rural Innovation, UNL

  2. Community Development Strategies • Consider assistance for businesses in transition as an economic development tool. • Plan for business transitions by identifying businesses that will be experiencing future transitions. • Market businesses to potential buyers inside and outside the community. • Facilitate relationships among buyers, sellers and potential lenders. • Utilize tools to support new business owners such as low-interest loans and training programs. Presentation for CDS, 2/23/01

  3. Business Succession Rates • 90% of 21 million U.S. businesses are family-owned. • 30% of family businesses succeed to second generation. • Another 15% survive into the third generation. Source: US Small Business Administration Presentation for CDS, 2/23/01

  4. Why Owners Don’t Plan The majority of business owners do not plan for their succession. Why? • Don’t like to think about getting older or even the possibility of death. • Can’t imagine their lives without their businesses. • To busy managing their businesses on a daily basis. Presentation for CDS, 2/23/01

  5. Areas of Concern for Business Owners • Control. Who is in control of the company during transition? If possible, incorporate a training phase for the new owner, with a gradual shift of authority until actual business transition. If the owner wants to wants to continue to be a part of the business an advisory board or Board of Directors can be a useful--the previous owner’s experience is maintained and helps to satisfy his role to stay involved with the business. • Income or Liquidity for Owner.Providing adequate income or liquidity during retirement is very important to the owner and/or the owner’s family. If liquidity is needed, then a cash agreement will be most desirable; if a stable income is needed, then an agreement that pays out over time will be preferable. • Estate and gift-tax liabilities. Tax laws are constantly changing and can have tremendous impacts on the business and owner. Consult professionals to assist with the any business transition • Preserving the Business. Many owners are concerned about preserving the reputation of the business. This was their “baby” and they want to make sure it continues, especially if their name is still attached to the business. Agreements can be structured to assure that the successors have a vested interest in having the business continue. Presentation for CDS, 2/23/01

  6. Planning, Planning, Planning To best meet owner’s concerns requires planning. Realistically owners should plan 5-10 years in advance of retirement, or at a minimum have a plan ready in case they become ill or meet an untimely death. Presentation for CDS, 2/23/01

  7. Business Tools and Culture • Incorporate Business Training • Utilize CDBG Funds • Develop Support Networks • Develop an Entrepreneurial Community Presentation for CDS, 2/23/01

  8. Types of Training • Exit Strategies or Succession Plans. • Business Training for new owner. • Combined training for owner and buyer. Presentation for CDS, 2/23/01

  9. Components of an Exit Strategy • Target Date for Change. What is the owners long-term role in the business? What plans must be in place prior to retirement and management by new owners. • Gain feedback. Involve key employees and family members. Enlist an outside facilitator to help with potential conflicts. Realize consensus may take years. • Create the Plan. The owner must decided when and how to remove herself from ownership. Including how to sell, to whom and how. • Publish the Plan. Once the plan has been created, let all invested parties know of the owners decisions. • Implement the Plan. Presentation for CDS, 2/23/01

  10. Selling Options • Sell to Children. If able, children can purchase the business outright or they can receive stock gifts ($10,000 per year per person) or inherit the business. • Sell to Employees. For a larger business, establish an Employee Stock Ownership Plan. This can be expensive to establish and may not bring the highest price for the business. Or a buy-sell agreement allows employees to purchase business at an agreed upon amount. • Sell to a Strategic Partner. Community networks can identify competitors or others businesses wanting to secure their market position or enter into new market through the purchase of this business. This option can result in a higher bid price for the business. • Sell to a Financial Buyer. Includes selling to an outside buyer, auctioneer or venture capitalists. Identifying these individuals can be facilitated by the community networks. Presentation for CDS, 2/23/01

  11. Word of Caution • Establishing the appropriate value of the business when selling is very important. If a company is undervalued, the Internal Revenue Service can set aside the entire transaction and set the business value. The results may be added gift taxes and penalties and interest costs. Presentation for CDS, 2/23/01

  12. Other Training Options • Skills for the new business owner. Assisting the new owner with business skill development can help the owner succeed. This is especially true if this business is their first. • Owner and Buyer planning together for business transition. The buyer gains experience and history from the owner, as well as the owner and buyer better understand each other’s financial and management positions. • Specialized skill development. Employees or family members made need specific skills such as accounting, managerial or technical training. Workforce Development efforts can assist with these training needs. Presentation for CDS, 2/23/01

  13. Other Business Tools:CDBG Funds. Funds are available through the CDBG Economic Development Category to help find potential buyers of commercial, retail and service businesses. Criteria of the funds: Business must be the only business of its kind in the community. Business must be an essential business to its community. Funds previously used in Allens and Clarks to find buyers for their communities’ grocery stores. Contact DED Field Staff for more information. Presentation for CDS, 2/23/01

  14. Other Business Tools:Community Networks • Evaluate what kind of networks are available in your community that assist small businesses. • Do these networks actively promote businesses to the community and seek potential buyers of transitioning business? • For industrial recruitment, work with the Public Power District and Department of Economic Development to help market industrial sites and building availability. http://sites.nppd.com http://business.neded.org/index.html Presentation for CDS, 2/23/01

  15. Other Business Tools:Developing an Entrepreneurial Community • Evaluate where your community can increase its opportunities for entrepreneurial development. Questions to consider: • Is there a need to strategically focus on attracting industry, tourism dollars or bolster down town business? • Are there regulations that prevent business expansions or start-ups home-based businesses? • Are taxes to high to attract new buyers? • Is there available credit or access to resources for prospective businesses? • Is local assistance available to help small businesses access credit or complete grant applications? • Is the community supportive of small businesses? • Provide the resources and skills needed to help your community’s business succeed. Presentation for CDS, 2/23/01

  16. Succession Planning Information Succession Planning - Passing on the Mantle http://www.sba.gov/gopher/Business-Development/Success-Series/Vol17/success.txt Transferring Management in the Family-Owned Business http://www.sba.gov/library/pubs/eb-1.doc Presentation for CDS, 2/23/01

  17. Sources Succession Planning - Passing on the Mantle http://www.sba.gov/gopher/Business-Development/Success-Series/Vol17/success.txt Transferring Management in the Family-Owned Business http://www.sba.gov/library/pubs/eb-1.doc Succession Planning: How to build a successful Business Succession Strategy. The Center for Financial, Legal & Tax Planning, Inc. 2000. http://www.taxplanning.com/taxtip1.html Succession Planning and the Buy Sell Agreement. Entrepreneurial Edge. Edward Lowe Foundation, 2000. http://www.lowe.org Presentation for CDS, 2/23/01

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