Alternate Solutions to Business Closure Due to Owner

Retirement Southern California Rapid Response Regional Roundtable Meeting

Los Angeles Trade Tech College September 17, 2015

Presented by Concerned Capital, Inc.

Critical Issue: Transition of Ownership

76 million boomers will be retirement age

by 2029 1/3 of the U.S. pop. Every 8 seconds another

baby boomer turns 65

Baby Boomer Business Owners No Exit Plan • 2006 study estimated 75% business owners don’t have an exit plan. • 2008 study- 96% of boomer business owners agree exit strategy is important. • 87% did not have a written plan. • 9 million of 15 million business owners are boomers. • One business owner turns 65 every 57 seconds.

Exit plans NFO survey 2001 ‘ baby boom’ bubble • 48% of business owners considered affluent • For them 1 in 3 will sell to external buyer • 1 in 3 will sell to family members • 1 in 6 will sell to employees • 1 in 6 will liquidate

Potential Buyers

External Buyer

Family Employees

Liquidation

GOAL: Bigger share of the pie for employees.

Retirement Issue Stats The last of the baby

boomers turned 50 in 2014.

Over the next 30 years, the 65+ population will

be larger than the younger generations –

first time ever.

42% of all after-tax income in the U.S. goes

to boomers.

Boomers and seniors have a net worth 3x

that of younger generations .

Critical Issues: Transition of Ownership Fewer than 50% of small

businesses are passed on to next generation

Small businesses are concentrated in low-

income communities/enterprise

zones and at risk to close or move .

Workers in these smaller companies, of less than 50 employees, comprise

84% of the private sector workforce.

Once these smaller companies vanish its

very difficult to attract new, living wage jobs

into these areas

Prepared for Concerned Capital by the UCLA Academy for Social Enterprise

2,000 Small Businesses are ‘at risk’ in LA’s County’s former Enterprise Zones

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2011 US Economic Census: Targeted Businesses in Los Angeles County Enterprise Zones

1050 3571 6543 923 743

Targeted Small Business

Number of Small Businesses Sold In Los Angeles Each Year 3100

Estimated number of businesses ‘at risk’ each year until 2029 2000

Interview with BizBin

Small business baby boomer owners retiring creates an urgent need for business transition solutions

12,830

So. California Jobs Annually “At risk”

0100020003000400050006000700080009000

So. California Jobs Annually “At risk” 243

2,263

591

737

849

402

472

510

333

Profile: Targeted Companies Job Characteristics Ownership Characteristics

20-75 jobs Family owned with strong loyalty to staff

Family wage, primary jobs Gross sales $ 3 - $ 10 million

Many long-term employees In Industrial/Manufacturing areas

In Mature Industries Requires new management

Potential to create new jobs Strong goodwill and solid financial history

Smaller companies are difficult to sell Customer concentration

Erratic financial performance

Market competition – domestic and global

When forced to sell – unexpected lifestyle changes

Inaccuracy and incompleteness of records – such as

unreported cash, hidden inventory, stale receivables

Owners’ Perspective on Sale

Small companies are often niche players. Their value is often

unrecognized except by their owners and

the people who work there.

Often, but not always, the children of the owners are

reluctant to enter the business

As owners age, they begin to look for an

exit strategy but can’t properly market their business and/or don’t want it known company is for sale.

Retiring baby boomers create an urgent need for business transition solutions

Sale to a Third Party May Not Give the Highest Value

It discounts or ignores intangibles

It undervalues the Real Strengths of

the Company

May view the existing workforce as more of liability

than an asset

Is commonly an Asset Only Sale– hence taxed as

income, not capital gains

Small business baby boomers retiring creates an urgent need for business transition solutions

Owners vs. Buyers– 2 Interpretations

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• Owners Think they’re Selling – repeat customers, perceived brand recognition in the marketplace, a great organization in place; a legacy of dependability and good service: INTANGIBLES

• Third Party Buyers Buy - multiples of cash flow – whether multiple of gross sale or multiple of profit or multiple of pre-tax profit (EBITDA), or a multiple of free cash flow : PROFITS

Management/worker buyouts as one successful solution

The owner generally is willing to stay in the picture

Selling a corporation ‘lock, stock and barrel’ to employees dramatically lowers owner’s tax liability – ordinary income become capital gains

Seek a quick, easy, rapid transition at the smallest expense possible

Understand the company, know its history and aren’t concerned about unknown liabilities

Why employee ownership makes sense

Adcraft : A Success Story

Small business baby boomers retiring creates an urgent need for business transition solutions

45 year old LA mail order company

Company saddled with debt and negative net worth

But owners pulled out $ 350k a year compensation for previous 10 years

Successfully sold to existing management team in 3 months

Saved 60 jobs

Characteristics of Many Management/Worker Buyouts

The business is sold lock, stock and barrel – as

a corporate entity and

going concern

Buyers have been with the company for 3 years or longer

The Buyers are motivated to make money

All parties are comfortable doing a deal

with each other and

there’s ample goodwill to

close a deal.

Transfer to Employees - Steps Key Employees

Letter of interest (LOI)

Valuation of business

Due diligence

Finance

Concerned Capital facilitates the ownership of a piece of the American dream

Ariza Cheese Manufacturing Company 40 year old artisan cheese manufacturer in Paramount, CA

Owner died and company run by 2 daughters absentee for 4 years

Starved for investment – sales ignored for lack of milk purchase

Take-over Jan. 2015 – added 6 workers and increased sales 30%

Saved 24 jobs

Concerned Capital’s Social Mission

Jobs in distressed

communities

Baby Boomers Retiring

Business

Transition Planning

We are a catalytic benefit corporation focused on bringing immediate social relief to unemployment by keeping living

wage jobs in distressed communities

We will maintain and improve the livelihood of distressed communities through small

business transitions

Concerned Capital saves jobs in distressed communities.

Employee Ownership as a Layoff Aversion Tool

Kent State Ohio Employee Ownership Center –Saving jobs by encouraging employee ownership Steel Valley Authority - Technical Assistance Services Available for

Transition of Ownership Kansas University School of Business - Transition Services Designed to

Retain Jobs Illinois Governor’s Task Force recommends employee ownership as

key to saving jobs –Governor's Task Force Report

Management Team Tomas Duran

President • Experienced urban planner and

financial manager – oversaw development of Genesis LA’s mission based funds and managed programs for Whittier Redevelopment Authority

Bruce Dobb

CEO • Chief Credit Officer for LA County’s

largest revolving loan fund and active lender in small business community

Concerned Capital Highlights

• Designed and implemented largest regional micro-lending program in LA • Launched American Apparel hiring tax credit program documenting over $ 4 million in State and Federal tax

credits • Assisted over 30 companies, formulated expansion plans and secured debt • Financial consultants to LA Mayor and former LA Community Development Agency and Fashion Biz Inc.

Questions?

.

Thank You!

www.ConcernedCapital.org (213) 787-4532

For more additional information about Concerned Capital and its programs contract Nora Almaguer, General Manager, at (213) 787-4532 or via email at

nalmaguer@concernedcaptal.org

@ConcernCapital