>>Like their public counterparts, private companies have an ongoing need to evaluate their capital and financial plans. Some form of multiyear finance strategy is essential to adapting—and succeeding—in today’s evolving landscape.

Three Chicago-area professionals who regularly advise owners of private companies shared their insights, challenges and guidance with Crain’s Content Studio.

How does your organization work with private companies; what types of services and/or products do you provide?

Andrew J. Welp: Our team of CFPs, CPAs and business and estate-planning attorneys has extensive knowledge of complex tax and financial matters associated with closely held businesses and their owners. We offer a wide range of tax, accounting, payroll, consulting and retirement plan services to help owners and their businesses reach their goals. Our position as an individual wealth advisor, coupled with our deep understanding of the client, puts us in a position to ensure that any transactions related to the business bolster the owner’s progress towards his or her own individual ideal future.

Robert G. Gerber: The lawyers in our corporate practice group advise a diverse range of private companies worldwide on complex transactions and strategies including obtaining working capital, establishing tax-efficient business structures, mergers and acquisitions, venture capital transactions, and sensitive client matters such as sophisticated wealth preservation issues, succession planning, multigenerational transfers, and family office and private trust company matters. We also assist with the establishment of governing and formation documents. Our private equity, venture capital and wealth planning practices are nationally recognized. We’re well-positioned to provide legal assistance to companies at every phase of their business life cycle.

Susan M. Boin: On the personal side, in addition to basic retail products, we offer business owners investment management, wealth transfer planning, family office services, brokerage and specialized personal lending including traditional loans or loans secured by other types of assets like artwork, boats or planes. On the business side, we help with traditional lending, equipment financing, treasury and

cash management, merchant services, commercial card services and investment banking. At Bank of America Private Bank, we also help our business owner clients integrate their personal estate plans with their business succession plans, to make sure that all of their needs are met through a cohesive planning process. If sale of the business is a consideration, we can help them prepare for and navigate that process as well.

What’s the most common issue you’re seeing private companies encounter?

Gerber: Without a doubt, the number one issue facing the privately-owned family businesses I represent is succession planning and intergenerational leadership issues.

Welp: The inability to attract and hold onto talent

remains the most common issue, regardless of industry. When business owners reach the point of being ready to implement a succession plan, oftentimes they look around and find no current key employees to work with on an internal succession. This can force them into a sale to an outside third party, which can be less than ideal if the owner values a continuation of the firm culture over simply receiving the largest payout possible.

Boin: From a lending perspective, we see many companies experiencing growth that are still operating like start-ups. They’re not preparing analytics to review revenues, profitability, asset and liability analysis, and key financial ratios.

How can owners decide whether they should self-fund their company’s capital needs or seek additional funding?

Gerber: Private companies traditionally follow a predictable financing path, starting with self-funding, then raising capital from friends and acquaintances, and then turning to loans, private investment and perhaps venture capital. Each business owner should question whether it’s time to take any of these steps while also considering the diversification of their own personal assets. That answer depends on financial and growth factors, the level of debt and marketplace position. In addition, maintaining control of the company and ensuring that it’s structured in such a way that its interests and those of its key stakeholders are protected is crucially important.

Boin: When evaluating options, owners should consider the cost of various sources of capital. In today’s low-interest rate environment,

SPONSORED CONTENT CRAIN’S CONTENT STUDIO

ROBERT G. GERBERChair - Corporate & Securities Practice GroupMember - Executive CommitteeNeal Gerber Eisenberg>>rgerber@nge.com>>312-269-8040

SUSAN M. BOIN Senior Vice PresidentSpecialty Asset Team Leader – Private Business GroupBank of America Private Wealth Management>>susan.boin@bofa.com>>312-828-3603

ANDREW J. WELP Wealth Transfer Advisor Savant Capital Management >>awelp@savantcapital.com >>312-225-0300

Bank of America Private Bank is a division of Bank of America, N.A., Member FDIC, and a wholly owned subsidiary of Bank of America Corporation.Investment products:

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FINANCIAL STRATEGIES FOR PRIVATE COMPANIES:SUCCEEDING IN TODAY’S EVOLVING LANDSCAPE

A ROUNDTABLE DISCUSSION

CRAIN’S CONTENT STUDIO SPONSORED CONTENT

ROBERT G. GERBER is chair of Neal Gerber Eisenberg’s Corporate & Securities Practice Group, advising wealthy families and entrepreneurs on critical business decisions and personal matters, including how to maximize revenues and preserve personal wealth. He also counsels clients on business leadership transition and preserving wealth across generations, finding innovative ways to ensure clients’ business interests and personal lives are protected. He is a member of the Development Committee of Chicago Legal Aid Clinic and the Board of Regents of Hebrew University of Jerusalem, and serves as vice president on the American Friends of Hebrew University’s Midwest Board.

ANDREW J. WELP is a wealth transfer advisor and oversees the Savant Private Trust division at Savant Capital Management. He works closely with the firm’s wealth advisors and financial planners to analyze client estate plans, develop wealth transfer and asset protection strategies, and assist with trust and estate administration. He is a lawyer and certified public accountant with memberships in the American Bar Association, the Illinois State Bar Association, the Chicago Bar Association, and the American Institute of Certified Public Accountants.

SUSAN M. BOIN is a senior vice president and a specialty asset team leader in the Private Business Group at Bank of America, where she manages equity interests in privately held companies that are held in trust, estate and investment management accounts. She also works with wealth strategists to assist business owners with estate and succession planning issues. She holds a bachelor’s degree in finance from Miami University, an MBA from Northwestern University’s Kellogg School of Management, and an ASA designation in business valuation from the American Society of Appraisers, where she served as the Chicago chapter’s business valuation chair from 2016-19.

ABOUT THE PANELISTSthey may be able to borrow “cheap” money and invest it in operations that can generate a higher rate of return. Borrowing can be a strategic decision, not only driven by necessity.

Welp: Whenever outside money comes into your business, you typically are either taking on some additional personal risk or giving up some portion of the autonomous control you previously had. Outside lenders may require that you pledge personal assets. New partners may require decisions to be run through them. All of this might be OK, if it allows you to grow the company at a pace unattainable without the influx of cash.

What types of loans are available, and what’s the best way for business owners to select and secure one?

Boin: Typical loans available are conventional, asset-based and SBA loans. Business owners should engage their banker so they can analyze the company’s financial statements, understand the company’s debt capacity and discuss the array of financing

options that match the particular business owner’s circumstances. If they don’t have a banker, they should seek a relationship with a firm that has a lending group geared to companies of their particular size, and even in their specific industry.

Gerber: Business owners tend to think of traditional commercial bank loans and credit facilities or small business association loans when they are growing quickly and need to secure capital, and such loans can be advantageous; they can be the least expensive to obtain. If the business is sailing along successfully and has a satisfactory credit rating, such a loan may be the right fit. However, an asset-based loan—which is based on collateral such as the business’s accounts receivable, inventory or equipment—may also be helpful. Some borrowers attach an unwarranted stigma to asset-based loans because they believe they’re associated only with distressed companies. In fact, we’ve helped many successful businesses decide when obtaining an asset-based loan may be a wise move,

and we’ve also helped them negotiate or find one with terms that are most beneficial. This option shouldn’t be disregarded without careful consideration.

Welp: Traditional models are seeing increased competition from firms offering remote digital-only platforms and new crowdfund-type options. If a budding business owner has a good enough idea, and a substantial enough social media presence, traditional financing can be skipped entirely in favor of the end consumer footing the bill ahead of time. Whether one of these new alternatives or a more traditional loan is the best choice will depend on several factors including the type of business, its level of financial need, the owner’s appetite for risk, the terms available, current interest rates and an ability to qualify.

How can a company position itself to be more attractive to a private investment or commercial loan?

Welp: It’s always best to have your financial house in order prior to seeking additional

Partner with us to fuel the growth of your private company.

Our corporate attorneys work with privately held businesses, family offices and entrepreneurs to facilitate access to capital at every stage of your business.

Whether you are seeking to fund a strategic acquisition through a commercial loan or taking a private investment to fuel growth, we work to ensure that all financing structures, no matter the type or size, are established with your business goals in mind. By negotiating innovative and tax-efficient terms and conditions, we ensure that you have flexibility for future business decisions.

Learn how we can help your business grow at nge.com/business.

FINANCIAL STRATEGIES FOR PRIVATE COMPANIES:SUCCEEDING IN TODAY’S EVOLVING LANDSCAPE

A ROUNDTABLE DISCUSSION

SPONSORED CONTENT CRAIN’S CONTENT STUDIO

capital. Have a clear business plan, be able to show what your cash flow looks like, have full financial statements—including an income statement and balance sheet—and copies of any contracts or agreements that are currently in place with vendors and customers. Lenders want to make sure they’re financing future growth, not the ability to keep the lights on. Keeping operational expenses to a minimum and having a clear vision for what the capital is going to be used for and how will propel a company forward.

Boin: Investors want to see if there’s a clear growth opportunity that management wants to take advantage of, or if they’re plugging a hole from a temporary downturn. Clearly a positive story is more attractive, particularly for an investor who wants growth. In addition, anyone investing in a business will look at the strength and depth of management. Are they capable of pulling off the strategies they’re proposing for future growth or will they need help? Lenders and investors want a well-rounded company with strong leadership and a history of solid execution.

Gerber: A company needs a defined leadership team in place, ideally with someone at the helm who’s successfully led a business through its growth stages or who has access to experienced counsel that’s guided other companies through this process. It also needs to have documentation in place that properly establishes its company structure, business plan and growth prospects, compensation and ownership issues, employee-related functions and so forth. Unless a business owner has been through it before, and even if he or she has, the process can be daunting. It helps to do everything possible to be certain every aspect has been covered in detail.

How can owners maintain control of the company and prevent it from being reduced or diluted over time?

Boin: To the extent that additional funds are needed from outside investors, owners can define the voting rights in a way that limits the amount of input those investors have on decision-making. The same can be true when designing employee benefits. While giving employees equity helps align their interests with those of the owners, phantom stock or stock appreciation rights can provide very similar benefits without diminishing ownership or control. As ownership interests may spread to more uninvolved family members in later generations, families can

buy back shares from those who have different priorities. These plans need to be funded appropriately, to make sure that buybacks don’t impede the company’s liquidity and ability to invest in future growth.

Welp: A prominent consideration is the timetable and method for retaining, then releasing, control. The transfer of equity interests, while allowing the owner to maintain control, can often be accomplished by re-characterizing the stock, creating both voting and nonvoting shares, and then transferring only the nonvoting interests. This allows the new ownership the ability to share in the business’ profits, while the founder maintains management of the company. This type of arrangement also works well in a family succession scenario where not all of the children are actively involved in the business. The founder can treat all of their children equally from an inheritance value standpoint, while ensuring that the son or daughter who worked in the business continues on as the decision maker.

Gerber: Ultimately, it’s a question of looking at the owner’s long-term goals and then putting the documentation in place to reach the desired outcomes. Structural mechanics such as super-majority voting rights, using different classes of stock and stockholder agreements with negotiated governance can help maintain control as investors come into the ownership of the company.

How can families prepare for the potential need to pull value out of the company to fund family priorities?

Boin: Families should first document their goals and priorities. Do they want all earnings to be reinvested in the business or do they want to support their community or other philanthropic interests? Do they want to allocate funds for education of family members or other entrepreneurial ventures? If estate taxes are expected, there are ways to fund those future payments, but planning with a qualified professional is essential. Without planning, a death could trigger an untimely forced sale of the business and diminish value built up over years of hard work.

Gerber: A variety of estate and succession-planning techniques can be useful. For example, having real estate owned through a family limited partnership can provide income and liquidity to family members without the need to make distributions from

the operating business. In some circumstances, captive insurance company planning might be worth considering for a closely held family business.

Welp: It’s important to work with an experienced financial planning firm long before the need to pull value out of a business becomes an issue. This gives the business owner the ability to craft a multiyear wind down or succession, as opposed to reaching a point where they wish they were out of the business yesterday. In addition, gradual transitions also typically result in the least amount of disruption to current business operations, as well as a larger return to the owner.

What are some considerations for owners dealing with resources pledged to the company, such as personal guarantees, buy/sell agreements or mandatory capital calls?

Gerber: Don’t have them. But if you must have them, it’s critical to properly negotiate these types of arrangements. For example, in some circumstances using things like “key person” insurance or structural payment plans can be helpful when an owner’s death triggers a buy/sell obligation.

Boin: If an owner can map out the timing and amounts of potential future cash needs, their private banker should be able to help structure the

funding of those future needs. Asset protection vehicles such as trusts or LLCs can protect personal assets from outside creditors. Buy/sell agreements need to have proper funding in place to avoid a potential forced sale at the death of an owner. Life or disability insurance tied to the other owners are common funding strategies, but qualified advisors should be consulted. To properly fund repurchase commitments, the value of the business should be determined and reviewed on a regular basis.

Welp: The best advice is to have a detailed document covering the terms and continually evaluating what those terms mean as they relate to the current state of the business. There should be no ambiguity on what the owner’s responsibility will be, should one of their partners die or the business need additional capital.

How can businesses plan for the transfer of equity from one generation to the next?

Welp: Considering family dynamics is critical because if you don’t, not only may the family business be lost, but more importantly the relationships among family members can be irreparably harmed. Owners can create separate share classes for children based on their involvement, allowing all an equal share but giving the

active child the only voting shares. They can also create a financing arrangement during their life in which the active child purchases the business over time and pays for it out of their increased cash flow. Or, if possible, the owner can purchase a life insurance policy to mitigate the difference in inheritance levels between the active and non-active children.

Gerber: It’s important to get the various stakeholders to discuss what goals and outcomes to pursue and the most effective strategies for reaching them. Many different techniques that address control and ownership of the business can be deployed. For example, trust planning, such as Grantor Retained Annuity Trusts—also called GRATs—or dynasty trusts might be effective tools. Corporate recapitalizations or restructuring providing for different classes of stock might also provide benefits where voting or control may be an issue.

Boin: If the owner has plenty of wealth and isn’t afraid of giving up control, they can gift shares to the next generation over time. If control over the business is a concern, non-voting shares could be gifted. If liquidity is a concern then sale of shares is another alternative. Various types of trusts may be appropriate for this process, so a business owner should work closely with an estate and trust attorney.

Fortunately, one of the top independent registered investment advisors in the

country has offices in the Chicago area.

Savant leverages over 30 years of experience and the collective wisdom of our highly experienced team to help people like you move toward your ideal future. By helping individuals and families preserve hard-earned capital while pursuing steady, wise growth, we’ve earned a strong reputation in our local communities, and significant recognition by discerning national organizations.

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