Your ability to track and quantify the financial impact of COVID on all facets of your business will have broad valuation implications for years to come.
How did the business perform during COVID-19?
This will undoubtedly be the new question owners will need to answer for years to come. COVID-19 will have both short-term and/or long-term implications on nearly every business - some in positive ways, most in negative ways. As we focus on life after this crisis, owners must - during the crisis - evaluate its impact on all facets of the business.
EBITDA and add-backs
For those involved in M&A, EBITDA (earnings before interest, taxes, depreciation and amortization) is the often-referenced, industry standard metric that plays a major role in how companies are traditionally valued. For those considering a sale of their business - the rule is that when you maximize EBITDA, you can maximize valuation.
Calculating EBITDA is equal parts science and art. In order to present EBITDA in its best light, it is necessary to adjust EBITDA to account for items considered to be extraordinary, non-recurring and one-time in nature (i.e. moving costs, one-time professional fees, expenses that could have been capitalized, investment and start-up costs) and those non-arms length expenses (i.e. excess compensation, owner related expenses, rent to related parties) that may be adjusted to market rates under new ownership. These are the proverbial "add-backs" that are used to normalize EBITDA as the basis for valuation. The impact of the Coronavirus could possibly be the mother of all add-backs.
The add-back is only as good as its justification
For investors and lenders to accept these 'add-backs' into their valuation and underwriting methodology, add-backs must be reasonable, well-documented and defensible. We recommend that business owners track the impact that the crisis is having on their business in as much detail as possible. Tracking should include not only include increased expenses, but also lost opportunities, changes to the business and impact on cash flow. Owners should also delineate between those that are one time in nature and those that will require a continuing effort.
Cast a wide net
Below are some practical areas to identify/quantify the impact:
Lost / deferred revenue, including any temporary price reductions or increases
Changes in product purchasing and sourcing (cost increases, freight expediting, etc.)
Employee/Office safety and cleaning measures (supplies, janitorial service, down time, etc.)
Employee absence or severance costs, and re-hiring costs
Increased compensation or incentives offered for employees
Information technology expenses to accommodate working remotely
Increased outside professional service costs (legal, HR, financial)
Expenses related to termination of leases or other operating contracts
We recommend that owners cast a wide net to capture as many add-backs and adjustments as possible to arrive at the newest important acronym EBITDAC.
Don't wait - Start tracking the impact now
While we recognize that owners are struggling with many important issues during these challenging times, it is best to start tracking the impact now. It will be more challenging to capture all these impacts on the business in hindsight, potentially years from now. Start tracking these today to ensure that more items are captured and there will be adequate support behind each impact, thus creating a more articulate and defensible add-back to EBITDA.
We are here to help
If we can help you in any way, including helping track the impacts on your business, please do not hesitate to reach out of any one on our team.
About Carter Morse & Goodrich
Located in Southport, Connecticut, Carter Morse & Goodrich is a boutique M&A advisory firm that represents founder-led and family-held businesses valued between $20 million and $200 million.
For more than 30 years, the combination of our hands-on approach, senior banker attention, strategic guidance, seamless transaction execution and extensive network of domestic and international resources has enabled us to become a trusted advisor to hundreds of business owners.
CMG's Broker/Dealer affiliate, Carter Capital Corporation, is a FINRA member firm registered with the SEC and SIPC.
Carter Morse & Mathias | The Tide Mill Building | 99 Harbor Road | Southport, CT 06790Carter Morse & Goodrich | The Tide Mill Building | 99 Harbor Road | Southport, CT 06890
203-349-8371 | www.cartermorse.com
Securities are offered through Carter Capital Corporation, memberFINRA and SIPC.
This information should not be construed as a recommendation, offer to sell, or solicitation of an offer to buy a particular security or investment strategy. The commentary provided is for informational purposes only and should not be relied on for accounting, legal, tax or other professional advice. While the information herein is deemed reliable, CMG cannot guarantee its accuracy, completeness, or suitability for any purpose, and makes no warranties with regard to the results to be obtained from its use.