COVID-19 has left many businesses teetering on the edge of uncertainty within their markets. As the pandemic continues to cause disruptions to supply chains, exacerbate labor shortages, and end lives around the world, many businesses find themselves in need of a little help. The government, in an effort to relieve the stress COVID-19 is creating for businesses of all sizes, has initiated a wide range of business loans, grants, and programs to assist business owners.
As people seek to sell their businesses or acquire new businesses, these various government programs are causing quite a bit of uncertainty in an already uncertain marketplace. Part of that involves the valuation process for determining the potential value of a business, how these loans, grants, etc. may factor into determining the value, and how they should be documented so that buyers don’t overpay.
How has COVID-19 Financially Impacted Businesses?
From the initial shutdowns, which started out as 15 days and extended much longer in most U.S. states, only businesses determined to be “essential businesses” were allowed to remain open. Many of these businesses faced decreased hours, the loss of employees who had to go home to care for home-schooled children or sick family members, and countless other challenges along the way. The labor shortage is an ongoing issue, even in states that have fully reopened, one that is driving wages higher and biting into profits that remain limited due to the ongoing reality of COVID-19.
Some businesses are beginning to make strong comebacks, thanks in large part, to things like the PPP Loan (paycheck protection program) programs which helped to protect paychecks for employees throughout the crisis.
The EIDL (economic injury disaster loan) program helps extend working capital loans to businesses affected by the virus to assist until normal business operations can continue. These loans are only available to businesses the SBA determines are unable to receive funds elsewhere.
The EIDL program is a loan. It is a low interest, long – term and fixed rate which offers business owners affordable financing for operations. A portion of the EIDL may, in some cases, be a grant that does not require repayment. The PPP program offers loans that are forgivable if they were applied for under the proper circumstances and qualifying factors.
How Have Government Loan Programs Helped/Hurt Businesses?
Obviously, the capital allowed some businesses that would have had to permanently close their doors during the pandemic to remain open. It kept income available to employees and allowed businesses to continue operating while providing the capital necessary to help them change the way they operate to accommodate the challenges COVID-19 presented.
Unfortunately, not all loans are forgiven and some must be repaid by the businesses. This could create financial hardships in the future and chaos for business owners wishing to sell their businesses before the forgiveness determination is final. Additionally, the lack of uniform accounting practices accommodating the loans and loan forgiveness (when provided) has created havoc with the business valuation process for buyers and sellers alike.
For the purposes of business valuation, Nick Fares warns that some businesses are counting the proceeds from their business loans as income for the business. What that does, according to Fares, is “artificially inflating their cash flow.” It makes accurate business valuations more difficult as it does not accurately reflect the actual income of the business. Nick warns that businesses need to seek information about PPP loans and EIDL loans and grants to ensure they aren’t used in the valuation process. He also advises that they should watch for a BWC rebate from the Bureau of Workman’s Comp, to make sure it’s not included as income.
What Do Buyers/Sellers Need to Be Aware of When Loans are in Play?
For businesses that have PPP loans that have not yet been forgiven, it creates an additional problem for buyers and sellers alike. For sellers, Nick warns that the “seller needs to understand where their PPP loan stands. They need to be proactive in getting an application for forgiveness quickly because … if the loan’s not fully forgiven, then they’re going to have to escrow funds at closing for the amount of the PPP loan.”
For buyers, the lack of a standard reporting method for these loan proceeds has many companies listing them as income, which is grossly misleading in the valuation process. It can result in significant overpayments for businesses. Some buyers are willing to overpay to some degree. However, it is better to go into the deal with your eyes open and a clear view of the actual value of the business based on sales, debts, and other value rather than inflated values generated by a loan.
Why Should You Use a Business Broker?
Unless you are someone with infinite time on your hands and broad experience buying and selling businesses in a mid and (hopefully soon) post-pandemic marketplace, it’s always a wise plan to use the services of a business broker who has this depth of experience.
They understand what is going on in the marketplace, how it affects business valuations, and moves buyers and sellers alike can make to protect themselves from various negative consequences. Fares suggests that business brokers know “where some of these potential kinds of traps are in a valuation and where some of these incentive programs are that you can take advantage of.” This can prove extremely helpful to anyone seeking greater clarification of the real numbers associated with the value of a business once you clear all the clutter from the picture.
Are you ready to buy a business? Now is a perfect time, before the uncertainty of future taxes come into the picture. Schedule a consultation with NEO Business Advisors today! We will help you learn more about your options, opportunities that may be of interest to you, and how to protect yourself better when buying a business in these uncertain times.