Maintaining Business Value

We’re all experiencing fear and uncertainty due to the Covid-19 virus- in terms of safeguarding our family and friends and securing or maintaining our businesses. As for our own personal safety, the mandatory “stay at home” procedures and self-quarantine actions are likely the best strategies at this time… hopefully, the virus will peak soon, and we can begin to re-build our lives.

As for our businesses, the uncertainty is less clear. However, one key question on everyone’s mind is: “how will this crisis (and economic slow-down) affect my company’s current value and what actions can I take in the short term (next 3-12 months) to secure and maintain my company’s value?

It’s widely accepted in the “M&A” and “Exit Planning” world that the purpose and goal of every business owner is to maximize their company’s level of “Transferable Value”… the “intangible value” in any business which makes it extremely marketable and attractive to buyers, or which enables your internal successors to continue the business without you. In times of crisis, or when the economy slows down, it’s even more important that you maintain and build your level of Transferable Value and put your company in a position to rebound quickly when things come back.

In the new “post- Covid” economy, your ability to maintain or build Transferable Value will depend on the action steps you take today to ensure that your company is (or remains) a “self-sustaining”, “quick responding” business which poses little risk to future buyers or internal successors. For most of us, this will be easier said than done, so let’s look at some of the steps you’ll need to take to make sure your covered.

The first, and one of the most important steps (at least in the short run), is to maintain the business’s financial viability- mainly monitoring its level of “free cash flow” and implementing financial metrics to measure company performance (albeit lower levels of performance). Even though the economy has come to a “slow crawl”, and revenues are down, it’s critical to identify how much “discretionary or free” cash flow exists (if any) and how that $$ will be used or reserved in the next 6-12 months. Ideally, we want to make sure we maintain enough cash flow to cover all necessary costs and expenses, including all “working capital” requirements and your key employees- yes, your key employees! When the economy improves, you’ll be poised to respond to greater demand and borrow or leverage cash, as needed, to expand again quickly. This ability to “scale down and scale back up quickly” is not only critical for your survival but will give you a huge advantage over your competitors when it comes to future buyers or your internal successors. It’s also very important that you adopt financial metrics (gross sales, EBITDA and cost reduction ratios) to measure changes in company performance (even though performance may be down), that you’re using industry accepted accounting standards and producing annual financial statements. Buyers and internal successors may also want to see your prior financials from the previous recession (2008-2010) in lieu of your new financial metrics and current financial data to determine what’s different (and better) this time. Hopefully, these action steps will give you the necessary leverage to negotiate future debt consolidation or borrowing opportunities with lenders (institutional and mezzanine) and will make your company more desirable by buyers or capable of being transitioned to your internal successors.

From there, it’s important to secure the value of your “goodwill” …the most critical asset in your business. This entails solidifying your “strategic commitment” to your existing customers. Communicating your commitment to meet their current and future needs as a strategic partner, not a vendor or supplier… making sure that their needs will be addressed (to the extent you can) and that they understand your “strategic plan” for maintaining your current viability and future value, thus being able to help them through this tough time. Looking at “monthly subscription models” or “on-going and deferred” payment plans for spreading out your fees and costs, as well as ways to be more “collaboratively” efficient and cost effective with the delivery of your products and services will protect your current business relationship and cement your place as a strategic partner. I find that times of crisis are the best opportunities to demonstrate your resolve and commitment to your cause, and the needs of your customers. These long-term strategic relationships are what will determine the future value of your goodwill when the time comes to sell or transition your business. I can’t overestimate the importance of this action step and the need to capitalize on it now.

Next to your customers, solidifying the commitment and dedication of your “key employees” is the most important action step for securing and maintaining your company’s Transferable Value. It’s crucial to make sure that all your key employees (those who directly impact the value of your business -mainly those who work with customers and directly affect your cash flow) are properly retained and “incentivized” to stay with the business through tough times…even though some of them may have to be temporarily laid off or absorb pay cuts. First, work with them to receive their needed unemployment benefits (if needed) and help them get enough $$ so they stay committed to your business through this period of uncertainty. If they are currently working, make sure that they are safe and protected…in and outside the workplace. Also, look at ways to include them in “higher level” or “strategic” related decisions which need to be made now. This will communicate your trust and commitment to them (personally and professionally) and will allow them to think and respond like an “entrepreneur” …the all- important attribute you want to develop in your key employees. I’m a big fan of conducting regular (weekly or bi-weekly) “advisory meetings” (virtual now) with the owner(s) and key employees to evaluate and decide on key strategic and operational matters…especially in times of crisis or economic slowdowns.

In addition, it’ll be important that you adopt new key employee “performance metrics” which are tailored to meet your newly forecasted financial goals, and which allow your employees to work virtually from home or other remote locations. The post-Covid economy will be very virtual, with new technical innovations for better remote communications. Having these new virtual platforms will not only attract better qualified employees but will increase the company’s Transferable Value…especially with future “strategic buyers” who want to internalize your virtual advantages.

Another important action step in building your “key employee group” (KEG) in times of uncertainty is to formally “vest” them into the business without giving up equity…this is arguably the single most important step in securing the future value of your business. The goal is to come up with a mix of “cash based” incentives which are affordable to the business and which will motivate your KEG to grow the value of the business…thinking and acting as entrepreneurs…and to retain them through the tough times and your final sale or transition. Each mix of incentive plan options needs to be “performance based”, meaning that each eligible key employee must achieve certain performance criteria to become eligible (which increase the value of the business), and that the company must achieve certain financial goals (generally increases in SDE or EBITDA) for the cash benefit to be awarded. In times of crisis, the financial goals will be considerably less than in times of growth. Each mix of incentive plans should also have a “vesting schedule”, which requires them to remain in the business for a minimum period (usually 3-5 years) before being able to receive an annual award of cash benefits…idea being that each years benefit award takes another 3-5 years to vest, thus, if they hit their annual financial goals each year their total earned benefits will vest when they reach retirement age or the business if finally sold. Lastly, all incentive plans should contain “forfeiture provisions” which cause all earned benefits to be forfeited in the event they intentionally violate the terms in their employment agreements (mainly the restrictive covenants) or are terminated for reasons of “just cause”. The idea being to incentivize them to “work with you”, not “against you” by trying to leave and compete.

The next action step for maintaining Transferable Value in turbulent times is to implement a “Business Continuity Plan” to ensure that the business’s current value will remain consistent in the event of your (the owner(s)) death, permanent disability, personal insolvency or eventual sale and exit (the “triggering events”). The Continuity Plan is the “master blue-print” which describes how all management and governance responsibilities are delegated and accounted for and who ends up with the equity in your business, in the event any of the triggering events occur. Most plans consist of a series of internal legal documents which consider the legal and governance requirements, the tax consequences associated with any transfer of ownership and the legacy considerations for all your “non-business active” children. It’s critical to have these documents in place and an updated (or at least reviewed) annually, but even more so in times of economic crisis or uncertainty. They are usually funded through some form of insurance in the name of and owned by the business (usually whole life policies) to protect against the financial losses caused by these triggering events. Besides providing organizational structure, properly designed and funded Continuity Plans provide buyers, and your internal successors, with the necessary confidence that the business will continue and grow without you…thus becoming a “self-sustaining” business which is attractive to buyers and needed for your internal successors (family members or key employees).

Lastly, maintaining or building Transferable Value in these tough times requires you to look inwards to reflect on your “personal and professional mission”…looking at the “why” you do what you do…and how you can provide more value to your customers while enabling your key employees to become more committed to your business. Times of economic crisis tend to be the best opportunities for “re-inventing” and improving your internal processes and procedures, re-examining your marketing efforts and sales collateral, re-assessing your strategic partnerships and determining your overall value proposition. In fact, most buyers, and lenders that are looking to provide funding for internal sales, love to see the documented progression of the business from the owner’s perspective. Defining and documenting where the business is headed naturally increases its Transferable Value since it makes the business more “turn-key” and “self-sustaining”.

Implementing these action steps won’t eliminate the coronavirus, or any other future pandemic threat, but they will help you stay “grounded” during these tough times and allow you to maintain and build Transferable Value in your company.

For more information on “how to” build Transferable Value, please contact me at [email protected].