A Gem From Scott Gabehart – Trying To Stave Off Devaluation of Your Business?

Trying to stave off devaluation of your business? Here are some tips.

Consider these checklists of both non-financial and financial steps.

Decisions made during the worst of times can often produce the greatest impact on business value over the long run.

Covid-19 presents a stark reminder of the need to proactively prepare for threats, emphasizing the essential role of risk-mitigation tactics such as business interruption insurance coverage that limits adverse revenue/earnings impacts. Once company cash flows return to normal, business owners should see the values of their businesses following the same path.

Earlier, I presented a series of “big picture” recommendations relating to the Covid-19 environment which included:

Use senior management team to foster employee acceptance of new plans and to present a uniform response to all stakeholders.
Focus on cash flow, cash balances and the cash conversion cycle.
Explore all avenues for support at the local, state, federal and private-sector levels.
What else can businesses do to combat the effects of the Covid-19 recession? As always, the answer is dependent on the size/type of company and industry.

There are substantial non-financial recommendations which apply universally, including:

Buy “profit/business interruption insurance” and make sure your property insurance selections include both business interruption and contingent business interruption coverage protecting income losses generated by inactive suppliers.

Consider automation and efficiency-promoting software.

Promote core values among employees, such as integrity, accountability, innovation and respect.

Collaborate with department leaders to categorize essential functions/roles that must be performed during a disaster like coronavirus, e.g. orders of succession for such roles should be three-deep.

Revisit the supply chain and pose “what if?” scenarios, e,g., if this particular country’s supply base is impaired, what is the optimal scenario for sourcing parts elsewhere?

Emphasize “product/service differentiation,” i.e., elevate switching costs and sharpen your value proposition to stand out.

Get (virtually) closer to your core customers so you can understand their shifting needs.

Focus on how your firm can help others during downturns. Make your product/service easy to understand and reflective of value propositions that resonate now, such as enhancing cash flow, reducing risk and anxiety, and providing a sense of belonging.

Aggressively diversify revenue streams and reduce customer concentration.

Build and utilize a team of outside advisers with “recession experience.”

Although not value-enhancing, business owners might benefit from formal estate planning based on currently depressed values. This could be the opportunity of a lifetime to “freeze” the value of the company and transfer future growth to your next of kin.

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Financial recommendations for mitigating loss in business value
Because “cash is king,” it’s desirable to prepare and follow a strict financial management plan as part of a comprehensive business plan. Myriad cash management suggestions and 10 critical key performance indicators to follow during crises can be found in a detailed survival guide from accounting firm SingerLewak.

Cash management should be second in priority only to maintaining health/safety, and that which is not measured cannot be managed.

Some additional suggestions:

Keep a vigilant eye on all operating and financial costs and keep all obligations “flexible.”
Create a “capital base” by retaining sufficient cash balances at all times.
Clean up your financials by eliminating “perks” and other discretionary outlays.
Create a database of contractual payment obligations and review debt covenants
Related to the above recommendations, a proper financial management plan should be followed:
— Have your accounts properly audited at least every 12 months.

— Use professionally prepared management accounts to monitor your business.

— Prepare regular performance projections and cash-flow forecasts.

— Regularly measure actual performance against the projections and forecasts.

— Monitor costs as closely as you do sales.

— Watch debtors and creditors closely.

With public markets losing close to 20% over the past several weeks, it’s almost irrefutable that private-firm values have also declined. However, the impact is a function of the type and size of business (as well as the industry) being evaluated. At this point, the presence of mere uncertainty is a major detriment to private-firm values – but there is much to be done as a means of mitigating loss to business value during these uncertain times

The Business Journals is offering a free webinar, Road to Recovery: Strategies for Business Owners, on May 14 at 2 p.m. Eastern. A panel of experts will discuss leadership strategies, information on relief programs and how to balance short- and long-term strategies. Register here.

Scott Gabehart, CBA, CVA, BCA, is chief valuation officer of BizEquity LLC, specializing in valuation of smaller, privately held and owner-operated businesses. Bizequity is a division of American City Business Journals.

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