In the past couple months of doing business appraisals, I have been surprised by the levels of value for some clients. They were at a time in their lives that it was time to sell no matter what. I was dreading having to tell them that the value of their business was down because of the current events. To my surprise, however, as we dug into the financial and operational analysis, we learned that some businesses are actually performing better than in previous years.
While the current events are causing real hardships, there have been upsides for some business owners. The value of your business may have increased this year and put you in a good position to sell if:
Demand has increased and revenues are up: Does your business provide something that has seen increased demand this year? Outdoor recreation has grown this year, as travel is restricted, and people are looking for socially distanced activities. Home improvement projects have also increased, as people want to improve their quarantine space.
Restricted supply has increased prices and margins: Many hard goods manufacturers have not been able to keep factories open, resulting in a decreased supply. Retailers who had an excess of inventory benefitted from increased prices and margins. This can be, of course, a double-edged sword. If inventory runs out, then there are no sales to make. Retailers who have managed to keep inventory in stock, however creatively, have profited from the situation.
Expenses are down: Personnel is typically one of our biggest expenses as business owners. Ironically, many businesses laid off employees in March and then experienced a resurgence of demand. In some cases, businesses realized they did not need so many employees. Some businesses were only able to provide core services and in others, a few team members were able to cover the gap. In all these cases, however, personnel expenses were lower, improving net income.
Risk is down: Volatility = risk. If your business maintained or increased revenues in this volatile year, your business stability versus the volatile market shows lower risk. Lower risk means a lower interest rate. (Think of it in term of consumer loans. Someone with a high credit score has lower risk, and therefore can obtain credit with lower interest rates.) All other factors being equal, lower interest rates result in high values.
Interest rates drive consumers to your business: If your business offers a product or service that consumers usually finance, low interest rates increase demand. Outdoor recreation sales and home improvements have doubly benefitted from the increased demand due to the situation, as well as an increase in ability to finance large purchases at favorable interest rates.
Competition has decreased: Some businesses were already at risk coming into the year. Some have had to foreclose. While this is an unfortunate situation because of the families and livelihoods impacted, the loss of a competitor affects the surrounding competitors. Less competition can make your business more attractive to an investor.
Running a business is more than having the right product in the right place at the right time. It takes management to bring all the factors together and keep a business profitable. As this year has demonstrated, there are additional factors outside of managers’ and owners’ control that also affect the business. The situations listed above may have impacted your business in positive ways, and may enable you to grow or sell your business sooner than you may have thought a few months ago.