SUMMER 2020
INDUSTRY KNOWLEDGE FROM OAK STREET FUNDING ®
Evolving
in the New Economy
SPRING 2021
FEATURES
LETTER FROM THE FOUNDER & CEO I hope you and your family are doing well and have not been negatively impacted by the pandemic. It’s hard to believe the disruptions experienced in our lives and businesses during the COVID-19 crisis. Given the hardships felt by some of our customers during this past year, we are proud to have been able to pivot rapidly and administer the Paycheck Protection Program (PPP) for our customers that requested stimulus money to help keep their businesses open. And, we were able to provide this service while continuing to lend to businesses from our remote work locations.
SPRING 2021
PUBLISHER Oak Street Funding EDITORIAL DIRECTOR Beth Saxen
6 | Strategic Acquisitions in an Evolving Economy
DIGITAL MANAGER Meghan Milam ART DIRECTOR | DESIGNER Beth Rogers The Bridge is a newsletter produced by :
4 | Financing A Partner Buy-In Agreement
8 | Six Ways Additional Capital Can Propel your Business 10 | The Importance of Managing Cash Flow
Oak Street Funding 8888 Keystone Crossing, Suite 1700 Indianapolis, IN 46240 844-395-8241 Loans and lines of credit subject to approval. Potential borrowers are responsible for their own diligence on acquisitions. CA residents: Loans made pursuant to a California Department of Financial Protection and Innovation, Finance Lenders License (#6039829). The materials presented are for informational purposes only. They are not offered as and do not constitute an offer for a loan, professional or legal advice or legal opinion by Oak Street and should not be used as a substitute for obtaining professional or legal advice. The use of this paper, including sending an email, voice mail or any other communication to Oak Street, does not create a relationship of any kind between you and Oak Street.
Our Vision To be the market leader in client experience for commercial financing by demonstrating our deep industry expertise and delivering unique and diverse product offerings through cutting edge technology, and exceptional employees and client service.
After over a year of working remotely, our team will soon be returning to the workplace. It will be good to have everyone together again as we continue to support our customers in their pursuit of new opportunities in this evolving economy. As the pandemic situation appears to be on the decline, many of our clients and prospects have the future of their businesses on their minds. Some are looking for a partner to buy into their business as part of their succession plan for that welldeserved retirement. Others are ready to grow their business by making strategic acquisitions. Still, others are looking for an infusion of capital so they can free up cash to allow for strategic activities, such as investing in people, marketing, and/ or technology, while others look to consolidate business debt into one manageable monthly payment. Given what is on the minds of our clients and prospects, we have created this issue of the Bridge to address how various loan products can be used strategically to position your business for additional success. We also touch on cash flow management, another key post-pandemic strategy that can boost your bottom line.
Copyright ©2021 by Oak Street Funding, LLC.
I hope this issue of the Bridge magazine sparks new ideas of how you can leverage capital to prudently pursue new opportunities and helps you think differently about ways to improve your business’s value. Should you have questions about how best to leverage capital, please know that everyone in this company, myself included, is readily accessible, deeply knowledgeable in your industry, and at the ready to help you make the best decisions for the future of your business.
All rights reserved. Any duplication without prior written permission is strictly prohibited.
Stay safe. And, as America starts to re-open, I hope to see many of you in person soon.
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Let’s Stay Connected Rick Dennen, Founder & CEO richard.dennen@oakstreetfunding.com
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The COVID-19 pandemic has impacted businesses in many ways, separating companies that are nimble and agile from those who have found it difficult to pivot. Beyond day-to-day challenges, the pandemic has also led many business owners to take a long look at their company’s future and their ongoing role, which must now include planning for an ever-evolving economy. As such, it comes as no surprise succession planning is on the minds of many. What will happen to your company when you’re ready to move on or if something happens to you? If you have a succession plan in place, you’re ahead of most companies, but if not, the pandemic likely has served as a not so gentle wake-up call. Business owners naturally focus on their own retirement plans when creating succession plans, but their exit is only part of the equation. An effective succession plan also has to consider preparing a current employee – or employees – to replace the retiree and take ownership of the business. This process is often referred to as a partner buy-in agreement.
Why a partner buy-in agreement? A formal partner buy-in agreement is critical for two reasons: 1. Part of the cost of becoming a partner is agreeing to support retiring partners financially. 2. An agreement assures the new partner(s) will eventually benefit from the extra responsibility associated with their new role(s).
What makes up a partner buy-in agreement?
Financing A Partner Buy-In Agreement The pandemic has led many business owners to take a long look at their company’s future and their ongoing role, so it comes as no surprise succession planning is on the minds of many. 4
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• Partner buy-in agreements should be explicit in describing costs, financing options, and expectations for a new partner or partners.
• Agreements should spell out roles, required performance, and any mandatory professional development.
How do you finance a partner buy-in agreement? Few potential new partners have access to a significant amount of cash. A more practical approach is: • The current partners arrange and guarantee financing from an outside lender, helping the new partner obtain a better rate and terms. • New partners pay the borrowed amount directly to the company, which adjusts their compensation to cover the debt service. • The company receives a healthy infusion of capital in return for taking on the loan guarantee. For more information on partner buy-ins, check out our blog, A Simple Map for Partner Buy-Ins.
“The COVID-19 pandemic has impacted businesses in many ways, separating companies that are nimble and agile from those who have found it difficult to pivot.”
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Strategic acquisitions in an evolving economy
Before your search begins, ask yourself these questions.
by Rick Dennen, Founder & CEO
What size of business do you want?
• Why are they selling? There are many legitimate reasons for putting a business on the market, such as retirement or succession planning, but some sellers may be trying to dodge financial or legal issues. Do your homework to avoid discovering financial or legal liabilities after the deal is done. Deliberately planned acquisitions typically offer the fastest, most efficient way to increase income quickly and provide a strategic way for owners to take their business to the next level. As we start to enter a post-pandemic society, pivoting to factor in a changing economy is critical. Let’s examine some of the factors that can make or break a strategic acquisition in this evolving economy. Strong market. The merger and acquisition environment continues to be extremely active, and there’s a good chance that trend will continue. However, keep in mind this activity can drive up the price of an acquisition.
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Aging business owners. The Baby Boomer generation is well on the road to retirement, with the first Boomers already qualifying for Social Security benefits. While some want to work as long as possible, many are retiring early to pursue hobbies or take on new, more satisfying roles.
and, most importantly, an investment banker. Keep them involved throughout the entire process, as their different viewpoints will be valuable to better navigate the ever-evolving business landscape.
Your team is hungry. People like to be challenged and to succeed. An acquisition can take employees out of their daily routines and inspire them to do more by linking incentives to the success of the acquisition.
If there’s a single secret to a successful acquisition, it’s exhaustive due diligence. Failing to do so is a key reason why many acquisitions fail. Protect your financial interests and professional reputation by answering these questions:
Seek expertise When it comes to acquisitions, it is critical to tap into knowledge and advice from a variety of experts. Build a team of experts, including your accountant, lawyer, financial advisor,
Perform due diligence
• How do they do business? Along with working with the owner, check business references and perform extensive research to turn up any irregularities. www.oakstreetfunding.com | 844-395-8241
• How are the numbers? An accurate valuation is critical. Don’t settle for pro forma financials. Have your accountant compare actual tax returns, compute ratios and margins, and examine the level of non-operating expenses. Watch for nonrecurring items that might artificially inflate income levels. • Are you compatible? Do you manage business in ways that are similar to the current owner’s philosophy? Are the company cultures compatible? Will the employees of both companies be like-minded? Since the answers are seldom quantifiable, you’ll have to rely on your observations and instincts. 844.395.8241 | www.oakstreetfunding.com
Does it need to be located within a specific geographic area?
Would you want the seller to stay on in a consultative role?
Do you prefer a profitable business or one that is struggling to turn around?
The critical transition The transition between owners is full of make-or-break moments involving employees and clients. Internally, employees want to know their jobs are secure, and that they will not face significant changes in their work environment or culture. Frequent, relevant communication is key to staying in front of disruptions in work. The more time you devote to getting to know your new employees and sharing and involving them in your plans, the less uncertainty they’ll face. If you’re combining office staff, give everyone a chance to get to know each other outside of work. Also, give employees the time to visit each other’s offices and discuss their work and share best practices – customer service, retention, sales, etc., that are outstanding in each.
Externally, clients want to be assured that their relationship with your business will not suffer any disruptions and that the acquisition won’t create any hassles for them. Focus on getting to know existing clients and reassuring them that they will not have disruptions during the transition.
Funding In addition to all of the above considerations, you will also need to find a lender who has the capacity to fund the transaction and will partner with you for the long run. The best way to do this is to find a lender that handles the entire process from application to closing in-house. Acquiring a new company will provide many emotional ups and downs, but if done with diligence, a strategic acquisition can lead to rapid growth and continued success for your business.
Rick Dennen is the Founder & CEO of Oak Street Funding, a specialty lending company. Rick founded Oak Street Funding in 2003 with one vertical—insurance— and has grown the company into a national business with nearly one hundred employees, multiple business verticals, and a portfolio exceeding $1B.
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Hiring and/or training additional employees
6Ways
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Additional Capital Can Propel your Business Companies with well thought through business strategies often have working capital available which provides greater operational flexibility, especially during changing economic environments
Providing cash reserves as business cycles fluctuate
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Expanding current operations
Purchasing technology to enhance the client experience and improve productivity
SEO
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You’ve worked hard to build your business. Really hard. As you continue to move forward, doesn’t it make sense to work with an experienced lending partner with the capital you need to support your business today, and your successes tomorrow.
SMM
Revitalizing marketing and advertising efforts
Capital. Partnership. Resources.
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Entering a new market
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Oak Street Funding – we’ll get you there. Call us at 844-395-8241 or visit oakstreetfunding.com to learn more.
In this current economic environment, managing cash flow is one of the most important things you do as a business owner or part of the leadership team. Ample cash flow enables taking advantage of strategic business solutions that can help increase your bottom line. When thinking of cash flow, think of how to reduce your most significant expenses. There are three areas to consider: personnel, overhead, and vendor costs. From a personnel standpoint, look at technology, especially automation tools or artificial intelligence systems, and see what they can do to offset the additional cost of adding or replacing an employee. Additionally, technology can create efficiencies for your entire team by simplifying day-today tasks such as keeping abreast of each client’s status in the sales funnel. Though technology can drive efficiencies and increase productivity, you should balance the benefits of these tools with the requirement to proactively manage them and extract their value. Therefore, headcount may not be significantly reduced but redirected.
The importance of managing cash flow 10
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Next, from an overhead strategy, it is essential to continually monitor every dollar that goes out the door by exploring if there are less expensive or alternative ways to accomplish how you operate and still meet your business goals. The importance of managing overhead costs became very evident during the pandemic where many companies still had to pay rent while their business moved to a
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work-from-home environment. Strategically thinking through the best working model for your business will continue to be critical going forward as you try and balance cash flow with the business culture you want to create. The last area to think about when managing cash flow is continuously looking at your vendor costs or costs of revenue and see if different opportunities will help the bottom line. This can be accomplished by continually reviewing vendors and getting competitive bids. Another alternative is to retrain employees to do the work the vendors were doing — especially if the work should be part of your core competencies and might enable a competitive advantage. This diligence of always watching costs and having this behavior reinforced by the management team will set the tone for the organization.
Establishing a regular cadence to review your major expenses such as personnel, overhead, and vendor costs is key to proactively managing costs. Further, instilling a cost management mindset throughout your team will also help ensure savings, which can then be leveraged to fuel future business growth.
When thinking of cash flow, think of how to reduce your most significant expenses. There are three areas to consider: personnel, overhead, and vendor costs.
Managing cash flow is essential for growing the bottom line and freeing up working capital to further grow your business. 11
Is it time to buy or sell your business? Oak Street Funding provides a no-cost, national service to bring buyers and sellers together. Our Exchanges: • Provide confidentiality: Only qualified buyers will know you are selling. • Expand your reach: Access buyers and sellers you might not otherwise be able to find. • Increase profitability: Our exchanges are completely free – so there are no brokerages fees or costs. • Keep you informed: Receive messages immediately when a new listing matches your criteria. • Deliver a convenient experience: Log on to our Exchanges 24/7 from any device. Insurance Insurance Insurance Business
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Click the desired button to visit the Exchange site or call 844-395-8241.
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