Covid-19’s double whammy for business owners
Many business owners have significant wealth – and retirement savings – locked into their business. Covid-19 may thus be a double whammy for many business owners, i.e. a loss of current earnings and, potentially, a substantial dent to their retirement fund.
This article offers a few simple but fundamental pointers in respect to the value of the business. It assumes that the business has not been completely shut down.
It helps to think of business value as a simple formula:
Value = Opportunity ÷ Risk
“Opportunity” is a catch-all for the benefits generated by the business, measured in revenues, gross profits, net cashflow etc. If these are projected to go down, business value will go down. If they go up, business value will be retained or increase.
“Risk” is an inverse measure of the predictability of the opportunity (the higher the risk, the less predictable the outcome). If risk goes up, business value will go down. Conversely, if you can at least understand and preferably manage and lower the risks, business value will be retained or increase.
It’s not easy but the alternatives are worse.
In challenging times, the businesses that will retain or increase their value are those that can:
- Figure out what customers’ real core needs are and find a new or better way to deliver on those needs. This will go a long way to dealing with the top half of the value equation (opportunity).
- Drill down into the challenges faced by the business and document if and how these can be overcome or managed (thus lowering the risks). This will go a long way to dealing with the bottom half of the value equation (risk).
Every business is unique, and every business owner can flesh out these steps. By reducing the analysis into a few key issues, hopefully the process is more manageable and less stressful.
On a more positive note, keep in mind that business valuation is forward looking. Once we get through this crisis, and the future for your business revives, its value will be based on its projected future earnings. Any losses suffered in the crisis should be normalised out of the valuation calculation.
Stay strong, stay safe. April 6, 2020