Key Takeaways:
What this may mean for you:
Address the Situation Head-On
We have shifted from a time of relative economic stability and expansion to one of insecurity and contraction, as a result of the fast-moving changes precipitated by COVID-19. According to the latest report from the Wells Fargo Investment Institute (WFII), the U.S. and global economies seem headed toward recession.
Consumers and businesses have rapidly postponed or abandoned discretionary spending as they wait and watch. Many businesses have been forced to temporarily close, and many employees are adjusting to work remotely. Uncertainty is likely to be the only certainty for some time.
In times of uncertainty, many may try to wait-and-see, but that may create even bigger problems. By acting thoughtfully now, business owners can help position their businesses to avoid an even more significant impact.
Financial Foundation
After you have addressed immediate concerns for family, employees, customers and community, you may want to wrestle with a number of other topics, and maybe even tackle some potential opportunities to prepare your business for a successful future transition. Below are a few topics that you may wish to consider and address quickly, many of which could generate both short-term impact and create long-term value. Some may even challenge your long-held assumptions about your business and the best ways to operate.
Liquidity and Operating Issues for Businesses Impacted by COVID-19
In times of economic crisis, we believe that cash is king. First, consider what your business needs are in the short-term and the steps you need to take to ensure its survival. Then, it’s time to think about the long-term, which is especially challenging at this time. Your customers and suppliers are probably experiencing similar disruptions, and no one knows how long the crisis will last or the extent of the government’s intervention. Despite the uncertainty, it is important to focus on what you can control by asking the right questions and taking appropriate steps.
Liquidity
Operations
Customers
Suppliers
These questions are a starting point for any business owner facing an economic crisis. You may find you don’t have all the answers, or that answers that work today may change multiple times. Asking yourself these questions may provide some insight, not only on how to survive in the short-term, but also how to better position your business to be stronger in the future.
Planning Strategies for Businesses and Owners Arising from COVID-19
In addition to the need to assess your company’s liquidity and operating issues related to the current crisis, you should consider opportunities that may arise because of the crisis. We present several ideas to consider once you are certain your company is well-positioned, and you can move forward with confidence.
Valuation-Estate Planning
With revenue and profitability under increasing pressure, deteriorating values in the public markets, and unknown length and depth of this financial crisis, business owners may be able to substantiate lower values for their ownership interests. It is important to recognize that there are risks and costs associated with implementing wealth transfer strategies.
Valuation-Acquisitions
For several years, many closely-held businesses have been selling at record or near-record multiples and valuations. These high valuations have discouraged some otherwise well-prepared and acquisitive companies from expanding through acquisition. Over the last several quarters, however, transaction/valuation multiples have remained relatively flat. In light of the current market, valuations are likely to decline, perhaps significantly. Companies with healthy balance sheets and available cash or debt capacity may have an opportunity to expand their market share or vertically integrate through acquisition in preparation for recovery.
Contingency Planning
The economic fallout of COVID-19 may highlight the shortcomings of existing business contingency plans. Some business owners may realize that they lack depth in their management teams, or that they should re-evaluate their existing shareholder / buy-sell agreements. Perhaps their succession plans or estate plans need updating. Once they have emerged from what is likely “protection mode”, many business owners may decide to address these issues aggressively so that in a future crisis their business, its shareholders and their families are better prepared.
Summary
As a business owner, you are facing many more issues than those outlined above, and you may have little control over many of them. In extraordinary economic conditions like these, we believe that preservation is the word of the day. Wait-and-see is a strategy that may not work in a downward spiral. You may recall the perils of the Great Recession, and as advisors, we are here to help you as you face similar economic issues. Acting now by starting these conversations is important and can be incredibly impactful. We are here to help you through these topics and more.
Disclosures
WFII: Wells Fargo Investment Institute, Inc. is a registered investment adviser and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.
Wells Fargo Private Bank provide products and services through Wells Fargo Bank, N.A. and its various affiliates and subsidiaries.
Wells Fargo affiliates may be paid a referral fee in relation to clients referred to Wells Fargo Bank, N.A.
Wells Fargo Bank, N.A. (the “Bank”) offers various advisory and fiduciary products and services including discretionary portfolio management. Financial Advisors of Wells Fargo Advisors may refer clients to the bank for an ongoing or one-time fee. The role of the Financial Advisor with respect to bank products and services is limited to referral and relationship management services. The Bank is responsible for the day-to-day management of non-brokerage accounts and for providing investment advice, investment management services and wealth management services to clients. The Financial Advisor does not provide investment advice or brokerage services to Bank accounts, but does offer, as applicable, brokerage services and investment advice to brokerage accounts held at Wells Fargo Advisors. The views, opinions and portfolios may differ from our broker-dealer affiliates.
Brokerage services are offered through Wells Fargo Advisors. Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC, and Wells Fargo Advisors Financial Network, LLC, Members SIPC, registered broker-dealers and separate non-bank affiliates of Wells Fargo & Company.
Wells Fargo & Company and its affiliates do not provide legal advice. Please consult your legal and/or tax advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your tax return is filed.
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