How Will This Covid-19 Crisis Impact My Business Value?
We are certainly navigating unchartered waters right now amid the COVID-19 pandemic, and this is especially the case for small business owners everywhere! I have met with several business owners in recent months whom have shared that they aren’t ready to sell yet but might be ready in the next few years. So, what does this crisis mean for them now that they are impacted by this unexpected crisis? Are you in a similar position? Are you concerned about how this will impact your business’s value?
If you are, don’t panic. Yes, it can be a stressful time, but continue to “mind your business today” and in the days to come. Will this crisis impact your business revenue for 2020? Most likely, yes. We are seeing the hard-hitting impacts on the tourism economy, the hospitality industry, and countless others. However, we are also seeing other industries—service business like cleaning companies for example—hit a huge boom right now. So, the reality is this—different industries will be impacted in different ways.
Overall, most businesses will probably see much lower incomes in 2020, but do not take the position that all is doomed for your future business value. One low year of revenue does not necessarily reflect the true, intrinsic value of your business. You may wonder how I can say that, right? Well, here is how…
Let’s say your business has been increasing in revenue for the past three years—10% year-over-year for illustrative purposes. For 2017, you made $500,000; for 2018, you made $550,000; and for 2019, you made $605,000. You were on track to increase another 10% for 2020—$665,500—but then this COVID-19 hit mid-March, so now you are looking to lose 3 months of revenue (let’s assume you are averaging $55,458 for illustrative purposes—$665,500 divided by 12—and let’s assume we are only shut down for 3 months). That is $166,375. That means at best you are going to make less than you made in 2017 here in 2020—$499,125. Yes, I completely understand how that can be daunting and dejecting, but I’m not yet finished with my scenario yet…
2020 you make less than you did in 2017; however, in 2021, your business shoots back up to the norm and levels out somewhere around $600,000 for the year-end. Then, over the next couple of years, it picks back up with a year-over-year increase of not quite 10%, but perhaps 5-7%. An increase is still an increase, and Buyers AND lenders want to see your revenue increasing, or at least relatively level, not decreasing. With this portion of the scenario added to the previous paragraph, the grim 2020 now simply looks like an outlier year—not a normal year. This means 2020 most likely will not impact the future value of the business in the long-term (assuming the years following 2020 show recovered revenue) because it was an outlier, and there is a story as to why the sales were so negatively impacted.
The takeaway is this—focus on the positives where you can right now. Think of the end-game, and again, do not take your eye off the ball. Make the necessary pivots in your business where you can, and if you need assistance during this time, get it. Just remember, all is not lost even though it may feel like it right now. If, as a Business Intermediary, I can be of resource to you or someone you know during this time, please feel to reach out. Be well, be considerate, and stay safe!