EBITDAC : What is Your Business Worth Now?

Several friends have sent me a picture of an EBITDAC coffee mug this week. As it states, EBITDAC stands for Earnings Before Interest, Taxes, Depreciation, Amortization and Coronavirus. Will this be the new measure of cash flow for valuing your business?

EBITDACA bleak joke, but one that is on the minds of many business owners, especially Baby Boomers in their late 50s and 60s. Many were postponing their exit planning because business has been so good. As one client told me, “In March we had the best year in the history of my company. It looks like April might be the worst.”

Downturns aren’t new, and recent history has more “Black Swan” downturns than most. Boomer owners have lived through the dot-com crash, 9-11, and the financial/housing bust. Even the Great Recession, however, was when most Boomers were in their mid-40s to early 60s. Most had ample time to recover, and to resume their business-building activities.

This downturn hits 4,000,000 Boomer owners when the youngest is at least 55 years old. The recovery time is uncertain, and regulatory restrictions on their businesses may be reimposed, perhaps more than once.

Factoring the Coronavirus in Valuations

Most Main Street acquisitions (under $3,000,000) rely on financial results over the previous five years for valuation. Those years have generally been good. In the middle market, professional buyers’ due diligence requests often seek results from 2008-2009 as an indicator of a business’s resilience in a contracting economy.

I think we can safely assume that both Main Street and mid-market acquirers will be carefully looking at the sustainability of your business through COVID-19. How much it affects your company’s valuation will depend largely on what type of business you own, and how you reacted to both any shutdown and the period immediately following.

One issue will be how buyers perceive the impact of Paycheck Protection Program loans and their forgiveness. It appears at the moment that the PPP loans will not be considered taxable income when forgiven. There are IRS rules for non-taxable loan forgiveness, but it will likely still appear as additional margin on your books. (The expenses it paid will still be deductible.)

You can be certain that buyers will be backing out the PPP loan forgiveness when valuing your business. They won’t be very interested in paying multiples of a one-time “free money” event.

EBITDAC : Short and Long Term Impact

Some businesses will see an immediate effect on their selling prices. Others may have a lingering change in how buyers look at their worth.

First, buyers will look at the scope of the coronavirus’ impact. Restaurants, caterers, event support, transportation (airlines, rental cars, party buses) and other hospitality related industries will be the worst. Not only are they the most affected, but they face the possibility that they resume with limitations on their business (social distancing in restaurants or limited passengers in vehicles, for example.) Any buyer would have to anticipate another period where they can’t generate substantial, or any, revenue.

If a business like those survives the shutdown, finding a buyer will be challenging. Third-party lenders will shy away from any involvement. Cash flow will remain tight, and credit will be harder to find.

The good news for those businesses is that the virus will end. When it is no longer a threat (presumably either because we find a vaccine, or we build herd immunity after a couple of seasons,) valuations should return to something more normal.

Other businesses will see valuations change over a longer period of time, and for different  reasons. They will be judged either by their ability to recover quickly, or by how their model changes to take advantage of life after the virus.

Regardless of the impact, some owners will use the pandemic as an excuse for years to come. Others will adjust and move forward. (See my description of an owner who was still blaming the Great Recession a decade later here.)

Planning for Your Comeback

Whether your business is essential and working much like before the pandemic, or non-essential but functioning pretty well remotely. this virus is going to change your strategy.

For an obvious example, lets take video conferencing. How are you preparing your sales team for the return to normal? Will they be more efficient? Are they able to cold call? Should their expense accounts be lower? Or are they (and you) just waiting to go back to what they did before?

If you are a manufacturer or a contractor, perhaps your business has been very healthy during this lock-down. What will happen afterwards? Will new competitors push into your market to replace business that they lost? Might some customers fade away, while others discover a newfound need for your offerings?

If you are surviving, how can you thrive? Do you expect landlords with empty space to negotiate cheaper rents? Will some skilled employees be looking for new jobs? Should others become pricier because of increased demand for their skills? Can the automation you implemented for remote work be extended to new efficiencies or new opportunities?

EBITDAC and Post-Coronavirus Exit Planning

If you were anticipating retirement before the pandemic, are you accelerating your plans or putting them on hold for a while longer?

In either case, you’ll need to understand the impact of the virus on your company’s value. EBITDAC 2It may be dramatic and immediate, or it may be only obvious afterwards when your performance is matched against that of your peers.

The definition of a Black Swan is “An unpredictable or unforeseen event, typically one with extreme consequences.” COVID-19 certainly fits the definition. It already has extreme consequences, but many of those are yet to come.

It’s not hard to figure out. Those who plan for a different world will do better than those who are taken by surprise. In either case, the impact of the “C” in EBITDAC will greatly influence any value generated by your transition from your business.

John F. Dini, CExP, CEPA is an exit planning coach and the President of MPN Incorporated in San Antonio Texas. He is the publisher of Awake at 2 o’clock, and has authored three books on business ownership.
Posted in Exit Planning | Tagged , , , , , , , , , , , , , , , , , , , , | 8 Comments

8 Responses to EBITDAC : What is Your Business Worth Now?

  1. Jim Maher, EPI STL Chapter President says:

    Love your thought leadership!!

  2. Julie Keyes, EPI Twin Cities Chapter Pres says:

    Good article, John!

  3. Ed Pratesi says:

    Great article!

  4. Frederic Farcy says:

    Good Stuff John

  5. Bill Entwistle says:

    Great article John. Glad to see that you discuss “Planning for Your Comeback”, as I think that many businesses will need to “grow” their way out of this situation. There are enough doom and gloom articles out there, we need to provide these business owners some hope and optimism.

  6. Craig Noto says:

    Thank you John ,Great Article, I am so glad you send out these newsletters as i am in the transition cycle right now and having a succession plan is the most important to all business owners. Im so glad that i was part of TAB for over 8 years and learned about balancing work & play and building teams that can run the company with out me. Stay Safe out there

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Morlocks and Eloi and the Virus

HG Wells in Time MachineAs I interact via Zoom and telephone with clients, family and friends, I keep thinking of H.G. Wells’ The Time Machine. As a life-long science fiction fan, I see our surreal living situations born of the world-wide coronavirus epidemic as separating us into different “classes” of people, who are quickly developing different views of the world around them.

In Wells’ novella, the Eloi are lotus eaters. Living in a classic paradise of beautiful weather and constant leisure, they’ve forgotten the instinct to innovate, and lost their survival skills. The machines that make their idyllic lives possible are maintained by the Morlocks, bestial beings who live underground and fear the light. The Morlocks, however, retain the ability to think, and survive by eating the Eloi.

Let me say here that the rest of this article is about the differences created by our current forced roles in society. I don’t think that any of us are really like either the Morlocks or the Eloi.

The Essential On-site Workers

Some of us are trying to work just like we did before. We go into factories or other essential businesses, where we interact with co-workers, customers and vendors. This is despite the fact that, outside of the workplace (and sometimes inside it) the media is feeding a constant message about why we shouldn’t be doing this.

We practice social distancing as much as possible, but we still have to cooperate. Some tasks require more than one person. Perhaps some areas of the company where we freely roamed are now “off limits.”

If we are first responders or medical professionals, we have to ignore distancing. There is a very real physical danger in what we do, but we do it anyway because we are needed. We do it up close and personal. Increasingly, we do it without the protective apparatus we always had before, even though the risk is greater.

Regardless of the type of essential business we are in, we all leave work eventually. When we shop for food, we see others in masks and standing on designated spaces 6 feet apart. We sometimes wonder whether we should do the same, since it wasn’t the practice at work. We worry that when we return to families who were isolated all day, we might be bringing the danger home to them.

The Remote Workers

Some of us work from home in non-essential industries. Others are designated as essential, but work remotely because we can. Still others rotate between remote and onsite work, trying to accomplish the same things whether we are at the business or at home.

We aren’t as productive, but can’t be sure whether it’s because we are distracted more or business has just slowed down. (Actually, if we have children at home we know that we are distracted.) We try to maintain a work day schedule, but the difference between Monday through Friday and the weekend has blurred. The novelty has worn off.

We are reminded of the words of Maggie Smith as the ageing Grande Dame of Downton Abbey, when her attorney-nephew proposed working in London during the week and spending weekends on the estate. She said “What is a ‘weekend’?” We were envious of that lifestyle when we first heard it. Now, maybe not so much.

Because we are at our computers, we check the news more frequently, especially “the numbers.” Our paranoia about contact with others increases daily. We avoid going out, and stare down people who come too close to us in stores. As the infection count rises, we worry about how long we can avoid being one of them.

The Non-Workers

Millions of us are out of work involuntarily. We wonder why our businesses are less important than others. We feed, transport and care for the appearance of the rest, why have we been left behind? What is specifically dangerous about cleaning a hotel room or standing six feet away from someone choosing a new pair of pants?

Most of us started suffering financially with the first missed paycheck, but others are educated, career-oriented professionals. We haven’t collected unemployment in our lives. How do we land on our feet when all our skills and experience apply to an entire industry that isn’t hiring?

On the lower levels, wages were finally increasing in real terms after a prolonged period of full employment. When we go back to work, if we go back to work, will it be for less?  Will we be among the lucky ones? Will our former employers be among the surviving businesses, or will we be competing with someone else’s ex-workers for their jobs?

Some of us are elderly or ill. We’ve lost whatever social interaction we had. We may not own a computer. In our living centers we are being fed in our rooms. There is no bingo, no mall walks, and no church activity. We are more convinced by the day that going outside is a death sentence, and are increasingly dependent on others to help us obtain basic necessities (which may not even be available.)

The Next New Normal

Eventually, most of us will go back to doing what we were doing before. The rules may have changed, but humanity has a genetic ability to build herd immunity. What is happening now to the whole planet is the second time around for many indigenous people, who were decimated by diseases brought by early explorers.

Estimates of the expected infection levels range from 20% of the population to 80%. With a world population of 7,800,000,000, and the infection count now reaching 1,000,000, that means we are currently at six-tenths of 1% of the lowest estimate. Even with 80% of that number getting only mild symptoms, that equates to over 300 million people who will be seriously sick. It could be a lot more.

Even with the current “rapid” rate of spread, things will not change for some time. Isolation may be lessened, or dropped for a while and reinstituted repeatedly. The one thing that is certain is that some version of this enforced trisection of society will continue for more than a couple of months.

As numerous behavioral experiments with blue and brown-eyed students have shown, humans will easily divide into “us and them” as a basic instinct. We already had a rise in authoritarian governments promoting “us and them” as a basic tenet of their legitimacy. On the world stage, that could be a real issue. An example on a very small scale is the reported rise in offenses against Chinese-Americans. This could escalate to a far greater threat.

We are in This Together

We need to be aware (and beware) of our natural tendency to trust our own tribes more than others. None of us are superior because we go out to work, or because we don’t. If essential on-site workers become ill at a higher rate than those at home, it isn’t because they are stupid or careless. It will all balance out eventually.

Those who stay at home aren’t cowards or slackers. They are doing what they have to in an attempt to protect the larger tribe. Those who can be productive remotely are keeping the wheels of the economy moving. Those who can’t be productive wish they could be.

The best effect thusfar may be to put our political pettiness in perspective. We’ve been like two children in a room full of playthings fighting over the same toy. Whether it’s Nancy Pelosi’s attempt to add a bailout of union pension funds in the CARES Act, or Greg Abbot’s use of hunker-down rules to close abortion providers, the public has made it plain that this isn’t the time for such foolishness.

We aren’t Morlocks and Eloi. Try to take at least one moment each and every day to acknowledge that we are all in this together. Thank the construction worker or supermarket cashier for being on the job. Call a shut-in, or better yet drop off something to brighten their day. Acknowledge the remote worker’s effort to keep the wheels moving with a call or an email.

Your tribe is small when the threats are small. When the threat is bigger, the best defense is for the tribe to get bigger. This is a time to be part of the big tribe.

I don’t usually ask readers to pass it on, but I’ll make an exception for this post. Pass it on, please.

John F. Dini, CExP, CEPA is an exit planning coach and the President of MPN Incorporated in San Antonio Texas. He is the publisher of Awake at 2 o’clock, and has authored three books on business ownership.
Posted in Leadership, Thoughts and Opinions | Tagged , , , , , , , | 4 Comments

4 Responses to Morlocks and Eloi and the Virus

  1. Thomas Dooley says:

    I love reading these Awake at 2am in the morning articles. Take care John, stay safe and looking forward to getting that lunch and beer together.

  2. John McAllister says:

    John Thanks so much for allowing us to pass this on to my FaceBook Friends.

  3. Don Maranca says:

    Great article, John. And agreed!

  4. Bernard Schayes says:

    Thank you for sharing John.

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Exit Planning in a Crisis

Why would you be exit planning in a  crisis? At the height of the economic expansion (a few months ago in late 2019) I was reviewing a company’s financial statements. Their sales were stagnant, and profits were minimal. When I asked the owner why his business hadn’t grown, he responded, “Well, the Great Recession hit our industry pretty hard, you know.”

planning in a crisisTake note that it wasn’t his fault. He was in a hard-hit industry, and the economy dealt him a bad hand. He ignored the thousands of businesses just like his that had grown and prospered in the last ten years.

Once you hunker down behind “It’s not my fault,” it’s easy to stay there too long. First you are glad that you survived. Then you are glad to be making a little bit of money again. Then you wait for the same conditions that made you successful before. If they don’t come, it’s not your fault.

In the meantime, others are coming out of the downturn firing on all cylinders. They used the slow time to get ready; to plan what comes next. When the door of opportunity opened again, they were ready.

Baby Boomers’ Double Whammy

The coronavirus is especially lethal in senior citizens. Many of those are Baby Boomer business owners. They have also suffered a double financial hit. Their retirement account balances are lower, and their businesses, whether closed or just slow, are worth less then they were a few months ago.

Many owners will try to kick the can down the road. “I’ll spend a few years building the business back up, then I’ll sell it.” For some, that was their plan after the recession. Unless you have something new up your sleeve, you may be waiting a long time for the right buyer to come along. In the next economic cycle, you may wait too long. You can only kick that can so far.

If you are a Baby Boomer, the time to be planning your exit is now. That goes double if you are sitting in your house wondering what comes next. Most entrepreneurs started a business because they wanted control over their lives. When there’s an event that takes away that control, your best response is to get it back.

Exit Planning in a Crisis

Your exit plan starts with some basic questions.

  1. Do I know how much I need to retire, with a professional analysis of my living expenses, life expectancy and inflation assumptions?
  2. Do I know how much my company is really worth, and who is most likely to pay me that amount?
  3. If #2 doesn’t meet the needs of #1, do I know how long, and what it would take, to get my business there?
  4. Do I know all the options for monetizing my business, including a sale to employees, another entrepreneur or professional acquirers?

If you are a Baby Boomer, unless you are exit planning in a crisis, you risk a discussion in 2025, or 2028, or 2031 that starts with “Well. the coronavirus hit our industry pretty hard, you know.”

There is a network of advisors in the USA and Canada who specialize in a reasonably priced, 90-day planning process for small business owners, and who use a suite of online tools to help you work through all these questions remotely. They can help get you started right now.

For a listing of these advisors, go here.

John F. Dini, CExP, CEPA is an exit planning coach and the President of MPN Incorporated in San Antonio Texas. He is the publisher of Awake at 2 o’clock, and has authored three books on business ownership.
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Quarterbacking is Not Exit Planning

Quarterbacking is a popular term when exit planners are talking to clients. It’s supposed to invoke a vision of someone who is in control. Think about a Tom Brady, Aaron Rodgers or Patrick Mahomes standing tall in the pocket, surveying the offense and defense unfolding before him.

There is a real problem with using “Quarterbacking” when referring to your exit planning professional team. The quarterback calls the plays. The job of the rest of the team is to run them as instructed.  I’ve yet to meet a CPA or attorney who thinks that is the best way to develop a client’s exit plan.

Teamwork

Exit planning, like no other form of professional consulting, is a team sport. When I am engaged by a client, I have the responsibility of defending his or her long-term objectives. The other advisors, who may include an insurance agent, financial planner, or appraiser, all have experience to lend to the process.

We can modify a plan multiple times and in many ways. The accountant may have some excellent restructuring ideas to save taxes. The attorney can add terms to a buy/sell agreement to protect the owners from having their equity unfairly valued by the IRS, or from having it pass to parties outside the company.

The insurance agent can mitigate the risk of illness or death derailing the timely transfer of the business, or of the surviving family being left destitute. The appraiser can develop valuations that take advantage of the discounts permitted under IRS guidelines.

Each of these professionals has a role, and should be able to add their skills to the process, with only one exception. They should not be permitted to do anything that interferes with the owner’s objectives. That’s the responsibility of the exit planner.

The Alternative to Quarterbacking

I prefer to think of the exit planner’s role as analogous to that of an orchestra conductor.

quarterbackingThe exit planner may not be as skilled in any specific discipline as the others on the team. He may know something about tax planning, or legal structuring or insurance. She probably knows a bit about valuation and even more about contracts.

But, like the conductor, he or she doesn’t know more about any of those subjects than the advisor who spends full-time in that area.

No one expects the conductor to step off the podium for a violin solo, or to fill in for the French Horn.  In fact, you don’t even want the conductor to tap the triangle for that one little note in the pause. If he did, he would be distracted from his primary role of keeping all the musicians on the same page.

Having one advisor coordinate the contributions of others greatly improves the overall result. Expecting him or her to dictate details outside his area of expertise is foolish. Expect your exit planner to lead without quarterbacking.

John F. Dini, CExP, CEPA is an exit planning coach and the President of MPN Incorporated in San Antonio Texas. He is the publisher of Awake at 2 o’clock, and has authored three books on business ownership.
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One Response to Quarterbacking is Not Exit Planning

  1. Jim Wisdom says:

    John: Thx for this Blog post. It helps to clarify the role of the Exit Planning Strategist for all concerned- the business owner, the other advisors, and even the Exit Planning Strategist. Great information!

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Exit Planning Checklist for 2020

The beginning of a new year is a great time to review your Exit Planning Checklist. All business owners will stop being business owners at some point.  So, there is no better time to begin planning for the inevitable than the present.  The earlier you begin planning, the more options you will have for a successful exit.

exit planning checklistHowever, like any strategic plan, it can be difficult to know how and where to begin.  With the start of the new year it’s also an ideal time for us to publish a basic “To-Do List” that will serve you in considering that most significant event as a business owner…your future exit.

DECIDE WHERE YOU WANT TO GO

Establish Clear Goals and Objectives for Exit and Your Life After Exit.

  • When do you want to leave the business? Whom do you wish to transfer/sell the business to?
  • What are your values-based and legacy exit goals?
  • What is your post-exit “life-plan”? Business owners can often regret leaving when lacking a plan for life that replaces the sense of purpose and meaning they experienced in building their business.
  • Update your Personal Financial Plan. Find out how much $$$$ you will need post-exit to do all you want to do. Is there a gap?

ASSESS WHERE YOU ARE 

Without Accurate Data All Planning Becomes Meaningless.

  • Get an accurate Business Valuation. If the business is your largest asset shouldn’t you know what it really is worth to potential buyers?
  • Assess your business Value-Drivers and areas of Risk.
  • Review your Business Continuity Plan for life transitions and unexpected death or disability. Co-Owners would include a review of their Buy-Sell Agreement to ensure alignment with the current goals of all owners.
  • Review Estate Plan to ensure alignment with exit goals.

 DESIGN AND IMPLEMENT A PLAN

Build Transferable Value and Enjoy a Future Exit On Your Own Terms and Conditions.

  • Which Exit Route will best accomplish your goals? Sale to Third-Party | Sale to Insiders | Transfer to Family Members | Sale to ESOP | Absentee Owner.
  • Focus on growth and profitability today. At the core of tomorrow’s successful exit plan is today’s profitability and plan for growth.
  • Strengthen business value drivers. An owner with a sellable business will have more freedom in life and options for exit.
  • Update a strategic financial plan for the business.
  • Do you have the right Team of Experienced Advisors for plan design and implementation?
  • Who will Manage the Exit Planning Project?

The most important thing you could do in 2020 would be to GET STARTED AND GET HELP if you have yet to do so.  If you wait until you’re ready to exit to begin planning, you won’t be ready and neither will your business.  Keep in mind, that “You don’t know what you don’t know” and, like in all other areas of life, that could end up being disastrous.

There is much at stake during this most significant event in your life as a business owner.  Take steps in 2020 to be as responsible and successful in planning your eventual exit as you have been in running your business. You can start with this Exit Planning Checklist.

Guest Contributor Pat Ennis is the President of ENNIS Legacy Partners (ennislp.com). The mission of ELP is to help business owners build value and exit on their own terms and conditions.

 

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