 Lakeland Currents, your public affairs program for North Central Minnesota produced by Lakeland PBS with host Ray Gildow. Production funding for Lakeland Currents is made possible by Bemidji Regional Airport, serving the region with daily flights to Minneapolis-Saint Paul International Airport. For information available at BemidjiAirport.org. Closed captioning for Lakeland Currents is sponsored by Niswa Tax Service, tax preparation for businesses and individuals online at NiswaTax.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 succession and by that I mean if you're a let's say you're a small hardware store owner in a small rural community and it could be downtown Duluth or it could be Minneapolis too but in the smaller communities when you have a hardware or 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 their doors and so we're going to 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? I think that's a fantastic summary. Well my guest this evening are 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 office is in Colquay that's right you live in Duluth and Bob Pumpquist 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 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 lumber yard or whatever and kind of help 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 my center within Extension the Center for Community Vitality has been doing business retention and expansion programming for G's 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 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 were telling us hey our main street businesses our owners are mostly baby boomers and a lot of them don't have a plan to to retire or plant a 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 was 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 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 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 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 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 where the whole population made a pretty big drastic drip dip 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% of businesses that failed failed because there was not a successful transition or a successful succession to that business so it's a it's a big deal and communities of all sizes both urban and rural i've 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 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's some of the research john that you've 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 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 the findings that we discovered some were surprising and and and some were not so the way that we kind of approached this was looking at business transition from a couple of different angles one is the 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 the businesses that that we heard back from. Bob you were gonna say something there. 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 there's 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 John 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 going to look at last minute so if if a person were 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 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 tax taxes for purposes yeah yeah 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 2,500 3,000 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 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 an 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 the particular businesses to to survey and of those that that we heard back the 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 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 the 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's transitioned 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 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 were 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 great overall strategy to do that the city of barnsville 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 chambers 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 could 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 um everyone be successful do either of your programs help identify personalities and i reason i ask that because i've seen some businesses that 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 that are selling to look for the right kind of person i think a little bit you are um you really don't have it in the end it's it's it's who is the seller who does the seller want to sell to but i think what we see is a lot of the sellers are 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 the within the community is a good employer provides good jobs so i think they are trying their best to make sure it's the best owner or buyer otherwise right of our lap again 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 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 already there in that social capital you know you know whether it's the local churches or the Rotary Club or 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 as successful as possible i know from a seller's perspective you're talking talking about how you can bring resources together to help get a business to transition successfully we're encouraging you know the formation of a you know of a good solid advisory team for at the community level well it depends depending on the community it it is at the community level but at the business level too i mean you're looking for the right type of of accounting support the right type of legal support you know do you have bankers or financiers in place that are supportive of of financing the transition of businesses you know certainly and you know we mentioned the chambers we're working a lot with the 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 business succession is is a very hot topic right now a big concern of 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 how do you deal with that how do you help them that's gives me a chance to to mention that you know a lot of those services do cost money when you're going to an accountant or an attorney or a business valuation or a 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 and when I say perceived cost it's probably it's it's it is an actual cost that maybe holds them back our organization then our span group did approach um uh rural development this last year for a grant that would help um covers up to 50 percent of those costs wow for a business owner that's in a rural community is a smaller business so under under 50 uh 50 employees and we're hoping that that's you know a little carrot that you can hang out there to get some of uh the business owners to you know take that leap as far as uh business succession planning um uh both uh in our area and the statistics nationally show that there's barely a third of the business owners out there that uh have owners that are um getting close to retirement have even got a formal plan in place so bob how would uh if a business owner is interested in that how would they contact you you know they could contact us uh and say hey you know what do um you know what are the steps what do I need to do um how does how does the grant work uh 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 percent of their of their expenses covered by the grant that that that we received and it would help cover the costs of um business appraisal um working within a cpa with uh with an attorney we're not looking at bringing somebody completely new in unless they actually need to have it um we're wanting to make sure that those business owners they may have part of their advisory team group of advisors already in place they're just not utilizing them right that would be their accountant and an attorney go ahead yeah well and I was going to 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 um an organization that's it's based out of Cleveland it's called the exit planning institute and there's a minnesota chapter it's not for personal life but for business yeah for businesses and uh that that institute or you know the the minnesota chapter has a lot of business advisors that are there that help businesses um 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 the owner isn't it because you're gonna end up just selling off your inventory and selling your buildings and who knows they may become a storage building or something right 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 uh they don't think that they're ever they're gonna they're gonna be alive forever and that's not the garage we don't want to see their exit plan being them being um building their lives in a stretcher and then having that burden being placed on on their family and to decide what's going to be done with the business then yeah and and from a community perspective this is important because uh one another thing that we learned through this research is that uh about uh two-thirds of the businesses that we interviewed had increased the number of employees that uh that are located at the business since they had taken the business owner and about the same percentage had increased their sales um so it's not just retaining the business it's actually expanding the you know their local economic contribution um 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 percent were uh people that were new to the community so I know Ben Winchester with my center has been here before talking about newcomers in rural Minnesota and what we found out was about 33 percent either bought the business and then moved to the community or or or vice versa 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 commitment to buy business and you've mentioned this a couple 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 oh I I think so yeah that's encouraging yeah you know you hear about the uh you know 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 will be very successful yeah yeah and and there's some uh you know different approaches that a community can take to come up kind of a community development approach to encourage younger people getting into uh 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 all 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