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The COVID-19 pandemic has brought countless financial concerns for businesses across the country as many struggle to thrive, or even survive. In this GJM Q&A blog we tackle a question any business will need to answer if they've received a Paycheck Protection Program (PPP) loan and a valuation is in the cards.

Question: How does a PPP loan affect business valuation?

Answer from Jeff Denning, CPA, ABV, CFF:  

The COVID-19 pandemic has had an enormous impact on the business sector. The U.S. stock markets were initially affected in late February. Accordingly, appraisers of closely-held businesses have generally considered additional investment risks, lower projected profits, and lower growth rates in valuation engagements using ‘as of’ dates from late February to the present date. 

If your company received a loan through the Small Business Administration’s Paycheck Protection Program (PPP), an appraiser will need to take that into account when working to arrive at a value for your business. A business appraiser should separately consider any PPP loan payable balance, offset by unused cash in the PPP account, if any, as of the valuation date and the probability of a forgiveness amount. The consideration of the use of the loan proceeds should be in management’s profit and cash flow projections and then part of the appraiser’s overall probability and scenario analysis under an income approach to valuation.    

Jeff Denning is a partner with Gilmore Jasion Mahler, LTD and has 30 years of accounting experience, with a focus on providing services as an accredited business appraiser, forensic accountant, litigation consultant, and expert witness. For the past 20 years, his career has been focused on performing business valuations, accounting investigations, and damage calculations; preparing hundreds of expert reports and appraisal reports; and providing accounting and financial expert testimony.   

You’ll find more resources related to the COVID-19 pandemic’s impact on your business at GJM’s COVID-19 Resource Center.

Established in 1996, Gilmore Jasion Mahler, LTD (GJM) is the largest public accounting firm in Northwest Ohio, with offices in Maumee and Findlay. Locally owned, GJM offers cloud-based accounting and provides comprehensive services including assurance, business advisory, tax, risk advisory, healthcare management and outsourced accounting. The Firm’s professionals specialize in industries including construction & real estate, healthcare, manufacturing & distribution and utilities.

Just as with so many industries, technology is transforming the accounting industry. Gilmore Jasion Mahler CPA Jeff Denning works with many different business owners to determine the value of their businesses. He says there’s no question technology and artificial intelligence, or AI, are changing things. The real question, he says, is whether or not those changes are a good thing when it comes to trying to figure out what your business is worth.

Jeff Denning has over three decades experience as a CPA. His expertise is business valuation and forensic accounting.

Established in 1996, Gilmore Jasion Mahler, LTD (GJM) is the largest public accounting firm in Northwest Ohio, with offices in Maumee and Findlay. Locally owned, GJM offers cloud-based accounting and provides comprehensive services including assurance, business advisory, tax, risk advisory, healthcare management and outsourced accounting. The Firm’s professionals specialize in industries including construction & real estate, healthcare, manufacturing & distribution and utilities.  

It’s one of those issues that you may feel you don’t have time for because you’re too busy actually running your business. But it’s an important question you need to ask yourself. What are your plans for the business once you’re out of the picture? It’s surprising how few business owners actually know the answer. Statistics show that almost half of family businesses have absolutely no succession plan.

Gilmore Jasion Mahler and Croghan Colonial Bank recently teamed up to present a business succession planning workshop for area business owners. They offered some valuable takeaways including 8 steps to ensure a successful transition to new leadership.

First and foremost, be realistic about how long it will take to sell your business. Croghan’s Paul Wannemacher says the average time to sell a business once it’s listed for sale on the market is 6-11 months. He says one should also factor in 2-3 months to close once an agreement is reached.

“Make sure you’re ready when that prospective buyer does come along,” says Wannemacher. “Create a descriptive listing of the business as well as an overview. Just like when selling your house, you need to think about “curb appeal”. You may need to resurface the parking lot, freshen the landscape or painting to make it look more attractive to a potential buyer.”

Once you’ve tended to that first impression of your business and informed your key management, here are the 8 steps to succession planning:

1. Get a handle on the marketplace. What’s the climate in your industry, the local economy and the national and international economies? Are there potential buyers out there?  Maybe your family members, managers within the company, maybe competitors?
2. Pull together a team of advisors. This team should include your CPA, lawyer, wealth advisor and commercial banker.
3. Get your business ready for transition

• Review metrics
• Make sure your records are accurate and up to date

It’s smart to anticipate some challenges along the way as you get your business ready for transition. Some of those challenges could include:

• Normalizing your income statement
• Cash flow/debt service history and capacity
• The condition of your balance sheet
• Collateral

Who is in the pool of potential buyers?

4. Get a valuation

Gilmore Jasion Mahler CPA Jeff Denning is an expert in business valuation. He says the first question you need to ask yourself before getting a business valuation is: what are you offering to sell?

“Are you selling all of the transferable assets of your business or a fractional interest or equity share? What about your client and customer relationships? Your contracts? What about your workforce? We’re in the midst of a critical workforce shortage,” says Denning. “Many businesses are interested in acquiring other businesses right now to acquire their workers.”

Another challenge can be landing on an asking price for your business. Denning offers these questions to ask yourself:

• Do you have a CFO or controller to assist in this process?
• Do you have an outside CPA with valuation experience?
• Do you need a business broker to help assess market potential or handle the entire sale process?
• Do you need a real estate appraiser?
• Grade your business against other comparable businesses
• Is the business transferable? Owner-operated? How much risk of retaining customers?
• Put yourself in the buyer’s shoes- your advisors should help with this perspective

5. Create a personal financial plan: What amount of sale proceeds do you need to be satisfied? Look at your living expenses, vacations and spending you anticipate, family and charity goals. Don’t discount the emotional toll of finally leaving a business you’ve nurtured and built over the years.
6. Prepare your family for the transition: The sooner you can let family members in the business know your plans the better. You may consider family wealth transfers through trusts or partnerships.
7. Work with prospective buyers: Some things to keep in mind as you consider bids: how will loyal managers and employees be treated? Will the new owners continue with the company, improve it, or close it down?

“The buyer may want you to stay for a period of time after the sale. Just be very clear what that continuing role might be and how long will it last,” adds Croghan Bank’s Chris Kelly.

8. Structure and close the sale

“Once you’ve identified a buyer, be aware that the final stretch can be as difficult as all the other steps that led you to this… and maybe more frustrating,” says Croghan’s Paul Wannemacher. “Will the business organization change? Will there be a reorganization? Are non-compete agreements needed?”

And, what type of financing is available?

• Seller financing (you take on all the risk)
• Conventional bank financing
• SBA 7(a)
• Collateral enhancement
• Equity investors
• ESOP

From assessing the marketplace to closing the sale, these eight steps are meant to be a guideline as you contemplate the future of the business you’ve worked so hard to build. While it may seem daunting, many financial experts agree that perhaps the worst thing you can do in regard to succession planning is to do nothing. If you and your financial team can come up with a strategy, you can rest assured that your exit will leave your business and your employees well positioned for future success.

Jeffrey S. Denning, CPA ABV, CFF is a partner with Gilmore Jasion Mahler, LTD. He has over 30 years of accounting experience, with a focus on providing services as an accredited business appraiser, forensic accountant, litigation consultant, and expert witness.

Chris Kelly is a Vice President and Commercial Loan Officer at Croghan Colonial Bank. He has over 20 years of experience in commercial banking, providing small to medium sized privately held businesses, nonprofits and professional firms with financial solutions.

Paul Wannemacher, CPA, PFS, CFP is a Vice President and Trust Officer at Croghan Trust & Investment Management. He has over 25 years of experience in trust administration, portfolio management, tax & financial planning and business consulting.

Established in 1996, Gilmore Jasion Mahler, LTD (GJM) is the largest public accounting firm in Northwest Ohio, with offices in Maumee and Findlay. Locally owned, GJM offers cloud-based accounting and provides comprehensive services including assurance, business advisory, tax, risk advisory, healthcare management and outsourced accounting. The Firm’s professionals specialize in industries including construction & real estate, healthcare, manufacturing & distribution and utilities. 

It's easy to value a public company. Just refer to the stock price. But private businesses often need to rely on a valuation report from an expert to find out what their business is worth. Gilmore Jasion Mahler Partner Jeff Denning specializes in business valuation. He says a valuation is an in depth report that you might compare to a real estate appraisal, except it's for your business, not your house.

Learn more about Jeff's expertise in business valuation and forensics, and don't forget to sign up for GJM's free quarterly newsletter The Expert. It offers timely and helpful articles with a focus on business valuation and litigation support.

Established in 1996, Gilmore Jasion Mahler, LTD (GJM) is the largest public accounting firm in Northwest Ohio, with offices in Maumee and Findlay. Locally owned, GJM offers cloud-based accounting services and provides comprehensive services including assurance, business advisory, tax, risk advisory and healthcare management. The Firm's professionals specialize in industries including construction & real estate, healthcare, manufacturing & distribution and utilities.

Do you need to figure out what your business is worth? If you’re looking into getting a business valuation, you have some decisions to make. Gilmore Jasion Mahler (GJM) Partner Jeff Denning specializes in business valuation and says you could pursue a detailed (possibly 100 page) report, or a less detailed report. Which one do you need? Jeff has some answers in our most recent video blog.

Learn more about Jeff’s expertise in business valuation and GJM's forensic services, and don’t forget to sign up for our free quarterly newsletter The Expert. It offers timely and helpful articles with a focus on business valuation and litigation support. Just click here for quick and easy sign up.

Established in 1996, Gilmore Jasion Mahler, LTD (GJM) is the largest public accounting firm in Northwest Ohio, with offices in Maumee and Findlay. Locally owned, GJM offers cloud-based accounting services and provides comprehensive services including assurance, business advisory, tax, risk advisory, healthcare management and outsourced accounting. The Firm's professionals specialize in industries including construction & real estate, healthcare, manufacturing & distribution and utilities.