How Business Owners Can Increase Value in An Economic Downturn
Economic downturns can be stressful for business owners. It’s great riding the waves of increased business revenue and profit during economic upswings, but being prepared for downturns are just as important, if not more, for a few reasons:
- The first is that you want your business to be able to weather the storm and survive with minimal sacrifices and while not becoming more vulnerable to competition.
- The second is that during a downturn your business can become “leaner and meaner” and use this period to increase the company’s overall value.
To make your company marketable from a selling standpoint, you will need to stay as profitable as possible during a downturn so your 5-year cash flow analysis remains strong while making growth in future cash flow projections more reliable. Needless to say, it is best to have a game plan prepared and ready to implement BEFORE the next downturn actually occurs (which could be right around the corner).
Proactive Tax Planning
An important item to take note of, many current tax-saving tools may be in jeopardy, as the tax laws in place now are likely to dramatically change.
During the COVID-19 lockdown last year, many businesses utilized the offering of PPP loans. I refer to that as a windfall government handout and doubt that we’ll ever see that type of program again. However, there are other action steps owners can take.
Strategically Use Losses in a Single Year
Let me preface by saying that your C.P.A. will need to advise you on using this strategy. Taking last year as an example, many businesses realized a net operating loss, yet had a drastic increase in profitability this year. If we head into an economic downturn next year, a business owner might want to have those losses carried forward to use in a single year to help minimize taxes, or could choose to keep them for future years. Your accountant will know what’s best for your company, but it’s worth looking into.
Take Advantage of R&D Tax Credits
Research and Development Tax Credits are potentially very powerful tools for business owners to utilize to recapture taxes paid to the Federal Government from previous years. Certain businesses qualify for this program such as manufacturers, technology firms, that utilize capital expenditures to develop processes, software, etc. If eligible, start-up companies and small businesses may be eligible for up to $1.25 million, or $250,000 each year for up to five years. According to an article published by Moss Adams, for a company to be eligible, it must meet two requirements: 1) Have less than $5 million in gross receipts for the credit year, and 2) Have no gross receipts or interest income dating back more than five years.
There are many other guidelines for qualifying for this tax credit. Please reference this article for more information.
Boost the Skills of Your Workforce
Your company’s workforce is the most valuable asset you have as a business owner. Why not train them and get reimbursed for it? For California business owners, the Employment Training Panel (ETP) has a program specifically for this. The Employment Training Panel is a business and labor supported state program that assists employers in strengthening their competitive edge by providing funds to offset the cost of job skills training necessary to maintain high-performance workplaces. The funding provides an upgrade of employee skills to help companies compete globally. ETP primarily targets Manufacturing, Transportation/Goods Movement Industries, High Tech, Agriculture, Healthcare, Construction, and Clean Tech.
Upgrade your worker’s skills by creating a customized training program that meets your company’s needs and makes your business more competitive in the marketplace – especially during a downturn. Michael Snead of Sierra Consulting Services is an expert to help get business owners up and running in this ETP program.
This may be an obvious area to address during an economic downturn but reducing the expenses and overhead of your business in a way that doesn’t disrupt operations or employee morale can be a great area to focus attention to and help maintain the value of your company. Some areas to consider are:
- Combining roles and responsibilities to more efficiently deliver products or services.
- Canceling or delaying planned expansions or equipment purchases. – It also might make more sense to consider expansions or equipment purchases towards the end of the downturn cycle.
- Eliminating customers or lines of services that require a high level of human capital or a high degree of customization, which can eat into profits.
Consider Growing Rather Than Shrinking
There are some tactics to consider in an effort to grow your business during an economic downturn. These include:
- Purchase the customer list of a competitor who is closing their business.
- Look at acquiring inventory, equipment, or staff from a smaller competitor. These may be areas that weren’t possible for your company a few months ago. Although as I mentioned earlier, you may consider this more towards the end of the cycle.
- Approach the seller of a company with seller financing and more flexible payment terms. Sellers are more willing to consider alternative sales structures when bank financing and cash are both less likely to be available.
Personal Planning Considerations
Economic downturns can disrupt the personal plans you may have for the business. There are three areas that an owner can address that may be impacted by the downturn:
- Business Continuity – How will the business continue if something happens to me?
- Exit Timeline – How have my personal plans changed? Do I need to adjust my exit target date?
- Family Support – Do I have family members who need additional support? Are there creative ways to help them?
As I mentioned in my previous article, there is much to consider in your efforts to build the value of your company (regardless of an economic downturn, or not).
Improve Your Company’s Growth Potential
There are several methods to explore to improve your company’s growth potential; one of which includes considering other markets you can enter. Are there other products or services you can develop and/or introduce? Another growth tactic is offering products or services that exist in your current lineup that your company can “cross-sell” to existing customers.
Maximizing Customer Satisfaction
Having highly satisfied customers is key to making your company more valuable. To make this happen, it’s important to really focus on your service operations. Highly satisfied customers increase the likelihood of repeat purchases, word of mouth growth, brand loyalty, and recognition. A good place to start is by determining how satisfied your customers really are. You approach this by applying metrics to assign an overall customer satisfaction score. The most common approach for this is the “Net Promoter Score.”
Take a Business Assessment
Start by prioritizing which areas to address when looking to build the value of your business in an economic downturn by taking the ExitMap assessment. It consists of 22 questions and produces a 12-page report. It takes approximately 15 minutes to complete.
Lastly, if you would like more information on developing an exit plan, feel free to email me at [email protected].
Steven E. Zeller
Steven Zeller is a CERTIFIED FINANCIAL PLANNER™ professional, Accredited Investment Fiduciary®, Certified Exit Planner, practicing Wealth Advisor, and serves clients nationwide. He has over 24 years of experience within his profession. READ MORE
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