Shifting Dynamics IN THIS ISSUE: PAID ADVERTISEMENT TODAY BUSINESS STRATEGIES Total Money Management from the professionals at First National Bank
Vincent J. Delie, Jr. Chairman, President and CEO F.N.B. Corporation First National Bank Rarely does the course of running a business go exactly as an owner plans. Sudden opportunities will arise, and unexpected obstacles are generally the rule, rather than random occurrences. It is all part of what makes running a business so challenging, exciting and rewarding. FNB has been successfully guiding customers’ enterprises — and our own — through shifting business dynamics for 160 years. In this issue of Business Strategies Today, we are examining some of the major upheavals that firms and their owners experience, both planned and unplanned. Transitional periods, including when the business entity changes, an owner retires or new partners are added, can be among the most seismic of shifts for companies. We examine those phases in a pair of articles about how to smoothly restructure a business and how to ensure a firm is ready for an owner’s departure. Of course, some new circumstances are unwelcome, and we consider one prominent disturbance that businesses increasingly endure in an article on responding to cyber fraud. Readers will find that such crises can be largely avoided with appropriate preparation and are survivable with further planning. Our final piece explores buying a franchise, a popular method for new owners to take their initial steps into the business world or for experienced entrepreneurs to add new ventures without starting from scratch. Any significant change to a business or for its owner is likely to require consultation with professional advisors, including a trusted financial institution. FNB has the experience to help owners manage change in an efficient, secure and cost-effective manner. Our team is always on hand to provide guidance and future-facing solutions that best benefit our clients and their businesses. I invite you to explore our business-centered products and services, as well as our award-winning eStore®, at fnb-online.com. THE FIRST NATIONAL BANK DIFFERENCE First National Bank, the largest subsidiary of F.N.B. Corporation (NYSE: FNB), is a growing financial services organization with a long-standing tradition of helping our customers and communities thrive. Throughout more than 160 years of service, we have remained dedicated to providing total money management solutions for our consumer, small business and commercial clients. We have a core business concentration on middle and upper middle market companies and serve their needs as a value-added partner. MORE INSIGHT FROM FNB You can always look to FNB for expertise on the topics and trends that have the greatest impact on you and your business. In Business Strategies Today, experts from across our Company have covered a wide range of subjects, such as making the most of the economic environment, staying the course to innovation and planning for the future of your business. Just a few of the topics we’ve covered recently include: check International Expansion check Interest Rate Management check Payments Solutions check Wealth Management check Succession Planning check Cybersecurity check M&A To learn more about topics that may benefit your business, call us at 1-866-362-4603 or visit fnb-online.com/business 02
04 TIME FOR TRANSFORMATION: TIPS FOR A SMOOTH BUSINESS RESTRUCTURING COMING BACK FROM CYBERCRIME: HOW TO RESPOND AFTER A BREACH 08 06 READY TO RETIRE? ENSURING A BUSINESS AND ITS OWNER ARE PREPARED FOR WHAT’S NEXT 10 BUYING A FRANCHISE? ANSWER THESE QUESTIONS FIRST FULL-SERVICE SOLUTIONS INSURANCE ▶ Property & Casualty ▶ Employee Benefits ▶ Personal ▶ Title WEALTH MANAGEMENT ▶ Trust & Fiduciary ▶ Retirement Services ▶ Investment Advisory ▶ Brokerage ▶ Private Banking Not FDIC/NCUSIF Insured Not Guaranteed by the First National Bank of Pennsylvania or its affiliates May Lose Value Not Insured by Any Federal Government Agency Not a Bank Deposit First National Bank of Pennsylvania does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice. COMMERCIAL BANKING* ▶ Corporate & Business Banking ▶ Investment Real Estate ▶ Builder Financing ▶ Asset-Based Lending ▶ Lease Financing ▶ Capital Markets ▶ Mezzanine Financing ▶ Treasury Management ▶ International Banking ▶ Small Business Administration (SBA) Lending ▶ Government Banking CONSUMER BANKING* ▶ Deposit Products ▶ Mobile & Online Banking ▶ Mortgage Banking ▶ Consumer & Small Business Lending ▶ eStore® Digital Banking Experience * Bank deposit products and services provided by First National Bank of Pennsylvania. Member FDIC. Equal Housing Lender. 03
TIME FOR TIPS FOR A SMOOTH BUSINESS RESTRUCTURING The majority of businesses in the U.S. are sole proprietorships or small businesses with few employees, but growth often demands a new organizational and/or entity structure. Such upheaval can be complex but advantageous — possibly offering the business new legal and liability protections, tax benefits and avenues for financing. Before, during and after a restructuring, business owners must take care to properly adapt to new circumstances, thereby creating a smooth transition for themselves and any new stakeholders. FNB-ONLINE.COM 04
to anticipate additional or different coverage that may be beneficial under the new entity structure. If a change in entity is accompanied by a change in ownership, policies likely will need to be canceled and replaced under the new owners and legal structure. ▶ Buy-Sell Agreements: Contracts that protect business transition plans if a principal retires, dies or becomes incapacitated. This is strongly recommended upon taking on new business partners, as the agreements preserve the interests of remaining partners and the principal’s family or successors. Funding for these agreements can include life insurance policies. ▶ Directors and Officers (D&O) Insurance: Coverage that protects those who can be sued as a result of holding a leadership role with a business, nonprofit or private corporation. Amid a reorganization in which a company’s management, controlling partners and/or entity changes, such policies can ensure protection from lawsuits or claims if there are any coverage gaps. ▶ Tail Coverage: When a business is restructured and a new legal entity is created, it is important to consider how best to insulate the new entity from unknown liabilities of the former entity. This can be accomplished by utilizing the Extended Reporting Period of the former policy or by purchasing a tail coverage policy for the former entity (generally, for a one-year, three-year or longer period). These policies can be important to address previous professional liability exposures, such as medical malpractice. ▶ Representation and Warranties Insurance: Highly specialized and primarily used in very large transactions — deals of $50 million or more, for example — these policies protect against any losses stemming from unintentional and unknown breaches of the seller’s representations made during a merger or acquisition. This coverage provides a backstop for previously negotiated indemnity — or can replace required indemnification protections altogether — and offers a smoother exit for the seller. For buyers, there is a higher ENTITY OPTIONS Beyond growth, companies restructure for a variety of reasons, including taking on new partners or changing ownership, mitigating financial crises, shifting business goals and adapting to market changes. An additional motivation is reducing personal liability for the business’ debts and obligations. ▶ Sole Proprietorships: The easiest type of business to start, featuring one individual who is the lone owner of a business, although they can hire employees. Profits are taxed as personal income, and selfemployment taxes are owed. There is no legal separation between business and personal liability. ▶ Partnerships: A good fit for small businesses with more than one owner or for professional practices, such as law firms. There are two common types: limited partnerships (LPs) and limited liability partnerships (LLPs). LPs have just one partner with unlimited liability, while others have limited liability and control. In LLPs, all partners have limited liability. ▶ Limited Liability Companies (LLCs): A blend of corporation and partnership structures, ideal for smaller companies that experience higher levels of risk. LLCs protect owners — referred to as Members in an LLC — from personal liability in most cases and, generally, are taxed at a lower rate than corporations. Profits and losses can be passed through to personal income. ▶ Corporations: More complex entities that provide strong personal liability protection and exist separate from their owners. It can be easier for corporations to raise capital or weather transitions in ownership, but they also pay higher tax rates and require extensive reporting. RESTRUCTURING WITH CARE Upon making the decision to restructure, it is a best practice for an owner to perform a business review, examining processes, infrastructure, objectives and more. There should also be a thorough insurance and risk management review — both to assess current coverage and, more importantly, likelihood to succeed on a potential claim than if no policy exists, as a seller has less reason to contest. ENJOYING A NEW ERA Restructuring can provide new life to a business — and new challenges. Professional advisors are valuable for guiding a transition, including attorneys and financial experts who can work with insurance agents to determine the safest way to reorganize. Check out fnb-online.com/business for products and services that support businesses in transition. SMALL AND SOLO According to the most recent data, nearly all U.S. firms have fewer than 500 employees, marking them as “small businesses” by the federal government’s definition. Their impact on the economy, however, is quite large.* ▶ 99.9% of U.S. firms are small businesses (33.2 million total) ▶ 86.5% of non-employer firms are sole proprietorships ▶ 74.7% of small employer firms are corporations ▶ 17.3 million net new jobs were created by small businesses from 1995 to 2021; 10.3 million by large businesses (>500 employees) ▶ Small businesses produce 43.5% of gross domestic product *All above statistics via U.S. Small Business Administration and Tax Foundation. Restructuring often comes at a time of expansion. Use the QR code for more on “Tips for Successful Business Expansion.” 05 BUSINESS STRATEGIES TODAY • FALL 2024
READY RETIRE? ENSURING A BUSINESS AND ITS OWNER ARE PREPARED FOR WHAT’S NEXT TO For many private companies, the most significant organizational shift will occur when an owner leaves the business or retires. 06 FNB-ONLINE.COM
FINANCIAL STANDING Exit planning should start as early as possible, even if an owner’s departure is decades away. Owners must regularly assess how much personal wealth will be needed to achieve their expected retirement lifestyle, quantifying savings targets and adjusting personal and professional goals as circumstances change. Strategies that preserve wealth and create a tax-advantaged income stream following a departure will be important. It is particularly essential for smaller businesses, as proceeds from cutting ties can be less than expected after taxes and settling any lingering debts. Additionally, pay-out structures can vary, from lump sums to annual payments. That is why contributing to common retirement accounts — 401(k)s and IRAs — and leveraging plans like health savings accounts are as beneficial to owners as they are to employees. Contingency plans for an unexpected transition, such as death or disability, are also essential. Funded buy-sell agreements, for example, protect remaining partner(s) and other interested parties amid such events. The deceased or incapacitated owner’s family may prefer to cash out their interests, so the agreement provides what is needed to buy out their share and maintain the viability of the business. Typically, a life or disability insurance policy assists the business in paying for the departing owner’s shares, pursuant to the agreement. MARKET CONDITIONS Transition planning often comes down to timing, especially when a business is sold to an external buyer. Along with historic company performance, current market conditions can drastically impact the proceeds an owner nets for a company. Unexpected events may affect business valuations and buyers’ motivations. For instance, owners who were ready to sell before the 2008 recession or COVID-19 pandemic may have had their plans upended by a wary M&A climate. It is difficult or downright impossible to project future economic scenarios, but owners can still control many aspects that place their business in the best position to sell — such as a strong management team, diverse customer base and flexible structure to pivot with the fluctuations of the market. Those factors and more help a company maintain smooth operations and efficiency, making it more attractive to buyers, regardless of external factors. PERSONAL FEELINGS Is the owner personally ready to leave? This question goes deeper than financial planning and speaks to someone’s goals for the next phase of their life. Business owners tend to be purpose-driven people — and quite often, their business and their purpose are intertwined, leading to seller’s remorse after leaving. Owners should have a plan for how they will approach life without their company. Maybe it’s traveling, a dedication to charitable work or even starting a new business. Upon determining a new purpose, it’s time to return to the financial plan to ensure there will be funding to support it. CUTTING TIES Readiness is among the most important components to successfully executing a business transition. A well-considered plan can still end poorly for an owner, the business or both if all stakeholders are not adequately prepared for what will be a major change. Working with the right financial advisors can help owners know what to expect and confirm they and their business are ready for what comes next. In the years leading up to a transition, owners must focus on preparing their business while still balancing their personal needs. But when is a company — and its owner — ready for a business succession? Consider these factors: EMPLOYEES TO OWNERS A popular way to prepare a business for a transition — or simply to create a unique benefit — is to shift some of or even the entire ownership stake to employees. There are varied structures and methods to do this, but companies of all sizes are finding success with Employee Stock Ownership Plans (ESOPs). Differing from stock options and other employee ownership initiatives, ESOPs are, essentially, qualified benefit plans, structured as trusts, that regularly award company shares to employees. Share allocations are normally based on tenure, compensation and factors determined by the specific plan. Upon leaving the company, employees receive a cash payout, which can be substantial depending on the business’ success and how the employee leaves (i.e., someone retiring after 20 years can receive more than someone who leaves voluntarily after five). Establishing an ESOP can be complex and requires ongoing compliance, fiduciary and administrative requirements, but the incentives provided by a plan positively impact both employee retention and performance. For an owner and other shareholders, it aligns employee interests more directly with their own and strengthens succession planning by increasingly transitioning ownership to employees. Visit fnb-online.com/FinancialPlanning for more information about the resources and expertise we provide. BUSINESS STRATEGIES TODAY • FALL 2024 07
Cybercrime remains among the largest threats to businesses. In 2023, U.S. companies were hit by just over 3,200 data breaches, impacting the records of more than 350 million individuals, according to the nonprofit Identity Theft Resource Center. Even when faced with state-of-the-art defenses, bad actors continually develop new scams and advanced techniques to poach sensitive data, extort businesses and cause disruptions, leading to financial, operational and reputational harm for enterprises of all sizes. While the first priority should of course be to prevent cybercrime, it is equally important to have a plan — along with the proper insurance policy — to respond if a breach occurs. Depending on the circumstances, the response itself can either make a bad situation worse or preserve a business’ positive public perception. COMING BACK FROM CYBERCRIME: AFTER A BREACH RESPOND HOW TO FNB-ONLINE.COM 08
1 2 3 4 REPAIR It’s the most important piece of the process — solving the problem. If there is a data breach, the company’s IT team or vendor should have preexisting protocols to contain it and mitigate immediate damage. For example, employee passwords may need to be reset, affected internal systems rebooted and the customer base informed of any steps they will be required to take. If it’s a ransomware event and systems fail, it may take weeks or months to determine critical data loss, and even if the ransom is paid, there is no guarantee all the data will be returned, unencrypted or made available. Consider the “3-2-1 rule” — three different immutable copies of important data, with two different storage means (i.e., cloud vs. tape), and one copy held offsite or offline. Law enforcement also plays a role in the process. Contact the authorities as soon as the breach is identified because cybercrime experts can assist in resolving the situation and perhaps identifying the fraudster(s). THE AFTERMATH When a cybersecurity incident is in the rearview mirror, it should not be totally out of sight. Consider what security deficiencies led to the issue. Quite often, it is human error that stems from lack of training. In other cases, a business’ internal safeguards are not adequate. Make no mistake, “lightning” can strike twice, as once a business is a target, its vulnerabilities are often served up online to other bad actors for a price. Prompt and focused action is a priority. In the aftermath, it is contingent on leadership to audit security measures, determine what can be done to enhance them and take steps to do so. Additionally, businesses with a cyber liability insurance policy in place will have the benefits of a team of experts to guide the recovery (see sidebar for more). TRIAGE Understand the problem. If data, such as customer or employee personal information, is stolen, how many individuals were impacted and what kind of data was it? Does the incident trigger a state or federal requirement to disclose or otherwise report the event? How did the theft occur — email scam? Malware? Is there a ransom demand? Is the threat active? Should systems or processes be suspended? Are systems even accessible? A company’s IT team or third-party vendor should be able to answer these questions. Additionally, if a business has the bandwidth to support it, an internal committee devoted to cybersecurity should meet often — including before an attack — to plan and decide the way forward for the organization. Businesses that successfully respond and quickly recover from these events routinely test their response protocols and train employees. Luck favors the prepared, and investments in cybersecurity will pay dividends with recovery efforts. COMMUNICATION Especially when customers are personally or professionally impacted by an event, transparent communication will be vital to retaining trust and continued business. Moreover, applicable state and federal requirements specify certain disclosures and government reporting of cyber incidents. Cyberattacks can be complex and difficult to resolve as fast as the public may like, so even if a business cannot share sensitive details in the short term, it can communicate about its processes and controls. Is an investigation in process? What is the company doing to prevent further harm? How will customers be affected, and how will they be compensated for any losses? This is a chance to explain how the business is proactively rectifying the situation. Having an at-the-ready communications plan will accelerate the recovery and limit reputational damage. In the event of an incident, a cyber liability insurance carrier can work alongside a company to solve the problem and cover insured costs related to these vital steps: As costly as cybercrime can be — and not only financially — it need not be fatal to a business. Active planning and transparency can help salvage a reputation and prevent even worse outcomes. In parallel with the rise of cybercrime, cyber liability insurance is now commonplace for organizations that are responsible for large amounts of sensitive data. These policies, be they individual or bundled with other insurance products, can be a lifesaver in the event of a breach or damaging cyberattack. Depending on the terms of a policy, cyber liability insurance can reimburse significant expenses in the wake of an attack, such as notification and credit monitoring costs, regulatory fines and losses from identity theft. Insurance carrier partners also can take on the legal liability of the attack and offer comprehensive cybersecurity risk management advice. All businesses are at a heightened risk for a cyberattack and fraud. Company size, type of information stored and revenues are often irrelevant as to how targets are found. Even businesses that do not house sensitive data are still at risk of being locked out of their systems with their operations interrupted, resulting in lost revenue. It’s never too soon to reach out to an insurance broker and identify the best policy for a business’ unique operational needs. FNB provides an array of products aimed at fraud prevention, such as Positive Pay and ACH Debit Filter treasury management services. FNB’s insurance subsidiary, First National Insurance Agency, diagnoses risk factors and connects customers with more unique solutions, including cyber liability policies. Visit fnb-online.com/protect-your-business to learn more. A TOOL TO PREP FOR THE WORST FNB’s insurance experts recently hosted a free webinar, “Cybersecurity Threats that Put Your Business at Risk.” Use the QR code to view the presentation on demand. 09 BUSINESS STRATEGIES TODAY • FALL 2024
FRANCHISE? ANSWER THESE QUESTIONS FIRST BUYING A FNB-ONLINE.COM 10
DO I KNOW THE INDUSTRY? Some of the most common examples for franchising are fast food restaurants. Go to a location representing any major chain across the country and the product, atmosphere and experience is largely the same, even if the ownership is not. Thanks to years of practice, the fast food industry’s business model, in general, is replicable, and the brands are among the best known in the world. Nonetheless, knowing a brand name or being a regular customer of a business is not an indicator of franchising success. A franchisee must understand the nuances of the respective industry and the broader obligations of owning a business. In fast food, for example, there is a rapid pace, high employee turnover, equipment maintenance and health codes to uphold. From restaurants to gyms and hair salons, all industries contain such unique characteristics. It’s contingent on a franchisee to understand what is within their skillset to manage, especially if the sector is new to them. CAN I AFFORD IT? While owning a franchise or set of franchises can be a lucrative career path, there are usually up-front costs. Depending on the market, type of business, real estate needs and the brand itself, startup fees and costs can be in the upper six figures and higher. There may be an available capital requirement that can price out a potential franchisee, and even after the business is up and running, regular royalty fees are paid to the franchisor for the right to continue using the brand and to receive training and support. There are several options to mitigate startup costs, including short- and long-term financing, equipment financing and Small Business Administration (SBA) loans. The latter may offer more flexible terms, lower down payments and loan guarantees by the SBA. CAN I PLAY BY THE RULES? Given a franchise is primarily an extension of a specific and, in many cases, well-known brand, there can be strict rules for operations. Operational processes may be rigid, there can be required documentation, unexpected costs to update equipment can fall on the owner, and there are likely limitations on marketing. For an owner who revels in creativity and chafes under restrictions, owning a franchise may not be the right decision. DO I NEED A HAND? Considering the myriad factors that swirl around opening a franchise, it is reasonable to seek professional assistance. An experienced business banker can assist with identifying and securing the right financing solution, while an attorney may be able to help parse contract documents to ensure a franchisee is clear on rules, fees and the specifics of the deal. With such guidance — and solid answers to previous questions — the process of opening a new franchise will go much smoother. Starting a new business can be a daunting prospect. Franchising is a potential option for individuals or groups who want to own a business but are not interested in starting a company or concept from scratch. Like with any venture, becoming a franchisee — an owner who operates a branded outlet of an existing business — presents both opportunities and risks. Franchisors — the businesses granting the license — have established procedures and resources to help position the new franchise for success, such as training, equipment, branding and market research. Those resources, however, come with costs, requirements and oversight from the franchisor, which means potential franchisees should ask themselves some questions first. SBA LOANS AND FRANCHISES The Small Business Administration’s (SBA) financing solutions are powerful vehicles to get new owners on their feet, providing working capital and assistance for startup costs. Yet, there are certain rules when buying a franchise to qualify for SBA funding. The chief consideration is whether the franchisor’s business is listed on the SBA’s franchise directory, found on the agency’s website at sba.gov. If the business is not on the list, the franchisee may not be eligible for financing. The list is updated frequently, so it’s possible a new franchisor hasn’t applied or been approved to the list yet. The nature of the franchise concept can also impact the terms of an SBA loan — how established the concept is, whether an owner is acquiring an existing location, etc. An FNB Business Development Officer can assist with the process and develop loan options to meet a franchisee’s unique situation and needs. Visit fnb-online.com/franchise-lending to learn more. 11 BUSINESS STRATEGIES TODAY • FALL 2024
160 Years Serving Communities Branches Across 7 States and Washington, D.C. Globally Recognized Digital Platforms Leader in Client Satisfaction for More than a Decade Top-Ranked Workplace There’s strength in numbers. 1600 ATMS More than TOP 50 100+Excellence and Best Brand Awards SINCE 2011 Nearly $48 billion Approx. $35 Billion in assets In DEPOSITS Largest U.S. Bank Holding Companies by total assets Coalition Greenwich Approx. 4200 EMPLOYEES Approx. 350 Branches Equal Housing Lender | NMLS #766529 | Member FDIC Since our founding in 1864, FNB has been empowering businesses within our community to do more. We offer a broad array of sophisticated products and solutions, local expertise and excellent customer service to help businesses of all sizes achieve their goals. And with our superior capital position and experienced management team, FNB has the strength and stability to be there for our clients today, tomorrow and through all economic cycles. To learn — and get — more for your business, visit fnb-online.com. Data as of September 18, 2024 President’s “E” Award for Export Service BANKING TECH AWARDS USA 2024 FNB 10-263
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