The coronavirus pandemic is wreaking havoc on the global economy as we’ve seen last week with the stock market crash that compares to what we saw in 2008 during the financial crisis. Many businesses, big and small have lost an incredible amount of money last week alone. And may still lose more the coming weeks if the spread of the virus is not contained quickly.

According to the New York Times:


Goldman Sachs economists expect global growth to slump to around 2 percent for the full year, down from their previous 3 percent forecast, but said in a note Friday that there are risks of a worldwide recession if the virus becomes a more severe global pandemic.”


So what will be the impact of this virus on the valuation of small businesses?


To answer this question we need to understand that valuation is based on three main factors: cash flow, growth, and risks. Assuming that growth is stable, the Gordon Growth Model calculates value as: Present Value = Cash Flow x (1+growth)/ (Discount Rate - growth).


So let’s analyze the impact of this coronavirus on small businesses through these three value drivers.


Impact Of The Corona Virus On Cash Flow

The cash flow of a company depends on its net income or profit. The net income depends on revenues generated by the company minus its expenses. When the revenues are reduced due to clients’ fear of virus contamination, the impact is immediate on your profit or net income. You will see a reduction in your profit, which in turn will reduce your cash flow. This cash flow reduction will adversely affect the value of your company.


Impact of the Corona Virus on company’s Projected Growth

The valuation of a company takes into account the projected growth of the company for the foreseeable future. This is important for investors as they seek to understand the long-term viability of the company they are looking to invest their money into. When a pandemic like the coronavirus is taken into account, it's hard not to lower the industry and the national economic perspectives on growth in the short-term (less than a year), medium-term (1 to 3 years) and long-term (4 to 5+ years). Therefore, the revised industry and national economic growth projections will have an immediate negative impact on any company’s growth forecast.

Because of that lower growth forecast, the company becomes less attractive to investors as the uncertainties mount over time. This has an impact on the value of the company.


Impact Of The Corona Virus On The Risks Of The Company

There are environmental or external risks as well as operational or internal risks in any company. They constitute together all the risks associated with doing business. The environmental or external risks are all these risks a company cannot control but that has an impact on the well-being of a company. They are mostly risks associated with the type of industry as well as the national, regional, or local economy.


When the economy is not doing well due to the impact of the coronavirus or when the industry in which the company operates is considered a high-risk industry, that has an impact on the value of the company as it is considered high risk for investors. The same is true when operational or internal risks are deemed high by investors due for example to the fact that a company has very few clients (no diversification), one key person running the company (no cross-trained employees), poor customers and/or employees satisfaction, low-profit margins, etc.


Conclusion

The valuation of small businesses will be lower to significantly lower if the virus continues to grow as projected by World Health Organization experts. It is hard to predict the real impact of the coronavirus on the national, regional or local economy at this point, but we are certain that if the disease continues to expand, that could install fear in communities, customers, employees and other stakeholders involved in a company’s well being.

The impact on small businesses could be catastrophic in the medium or long term. We see this happening in China already where businesses only have 2 months' worth of cash reserves to use in case of emergencies. After that, they will start closing doors and laying off employees. At that point, the company has no value what so ever.



Achille Ekeu

  • Achille Ekeu, MBA, CVA

Happy New Year! Here we are in 2020 and life is still going great for some, not so great for others, and yet we are here trying as hard as we can to make sense of the life God gave us.

If you are a small business owner, whether you are just starting or have been around for a while, you know the best way to make sense of your hard work and dedication to your business is to prepare it for a transition to a new owner. However, if you have not been preparing for it, in 2020 it will be a great opportunity for you to stop and think about it. In addition, we have some data that were very recently published that will help you make that decision comfortably.


Recent survey results of over two hundred small business owners published by The Wilmington Trust, uncovered important reasons why small business owners must have a viable transition plan. This survey shows small business owners where they stand with their peers.


Key Survey Takeaways


The four key takeaways from this survey are that:

  1. 58% of business owners have no specific plan despite the fact that long term transition planning usually results in higher business values, lower taxes, and more peace of mind for all stakeholders.

  2. 47% of business owners over the age of 65 do not have a specific transition plan, even though starting the transition planning process early in the life of the business has been shown to lead to better outcomes.

  3. 78% of business owners who do not have a plan say the main reason is that they enjoy running their company. But they may not realize that with proper planning they can continue to run their business, yet also maximize value and reduce taxation.

  4. 67% of business owners believe that they have a very good idea of their company's worth, but two-thirds of them also want to talk to an expert about valuation. This highlights the need for outside specialists like the Washington Valuation Group (WVG) who can accurately measure and help improve a company's worth.

Business Owners 5 Transition Goals


According to the survey, most small business owners' goals are to:

  • Ensure the company remains viable in the long run.

  • Take care of their employees.

  • Ensure customers are taken care of.

  • Financial security for self and family

  • Ensure the company retains values.

Business owners often rely on their tax professionals, lawyers, and accountants as the three most important advisors. They may be underestimating the importance of other experts.


Business Valuation Experts


Regardless of what goals a business owner has, the bottom line is that the worth of the company is what matters. Therefore, a business valuation is absolutely critical to making sure the owner does not leave any money on the table. A plan to maximize value must be in place hence the need for a business valuation expert.


According to the survey, 67% of business owners say they have a very good sense of their company's worth yet the same percentage wants to speak to a business valuation expert. Among those who claim to have a very good sense of their company's worth, 65% are still interested in confirming it.


Here at the Washington Valuation Group, maximizing the value of your company is our concern and we've helped many business owners determine and improve the value of their companies so they don't leave any money on the table when the moment comes.

Listen to some of them here.




Achille Ekeu is the President and CEO of The Washinton Valuation Group (WVG). He is a Certified Valuation Analyst (CVA) and board member the National Association of Certified Valuators and Analysts (NACVA). He is an Author, Speaker, and Consultant on business valuation issues across the US and beyond.

  • Achille Ekeu, MBA, CVA

If you own or are starting a business today, there is a new risk that you need to take into account in your business plan. Cybersecurity Risk.

What is Cybersecurity Risk?

Cybersecurity risk is the probability of a cyber attack or data breach on your organization. Organizations are becoming more vulnerable to cyber threats due to the increasing reliance on computers, networks, programs, social media and data globally. Data breaches, a common cyber attack, have massive negative business impact and often arise from insufficiently protected data.

While small business owners might think that cybersecurity risk applies only to larger enterprises, it is a big mistake to think that small businesses are not victims of cyber attacks as well. The internet has created a playing field where size does not matter. Small businesses are using technology everyday in completing their tasks, whether it is making a call on a smart phone or using e-mail. Many small business owners mistakenly believe that installing a firewall or using antivirus software is enough protection because their companies are small and do not have any "valuable" data. Cybersecurity breaches do not discriminate based on size. Cyber thieves look for opportunities. Small businesses are just as likely to have a cybersecurity breach as large ones-and they have far fewer resources to deal with one when it happens.

In today's world, cybersecurity (like accounting) is a business process that permeates every area of the business. Accounting is a part of the sales cycle; so is cybersecurity. Accounting is a part of the supply cycle; so is cybersecurity. Accounting is a part of the manufacturing process; so is cybersecurity. The point is simple. If a valuation professional gets a bad feeling about accounting, the value of the business is questioned. Likewise, if the valuation professional gets a bad feeling about the cybersecurity, the value should be affected.

It is not required that valuation professionals be cybersecurity experts. Valuation experts are smart enough to understand that a risk exists, and it should be quantified or excluded from the valuation scope.

If the costs to mitigate or correct the breach are minimal, then there is less of a problem. However, if those costs are substantial, then the reverse is true.

Cybersecurity, a Key Consideration of any Business Valuation

As you may know, Value is calculated by dividing Cash flow by the Risks inherent to the company. We know that risk affects valuation, but only recently has it been recognized that cybersecurity is a pervasive risk. Once insurance companies started selling cybersecurity insurance, any arguments to the contrary were dispelled. The fact that there is a burgeoning market for cybersecurity insurance is validation that cybersecurity is a real risk. It could be the subject of an entire article, but cybersecurity insurance is not a "get out of jail free card" for dealing with cyber risk. It is the last resort. In addition, cybersecurity insurance has many landmines of its own because it is a non-standard form policy.

In today’s world, most businesses are forced to operate on top of an IT infrastructure that is inherently insecure. Not every business must use this IT infrastructure to move and store sensitive data, but for most businesses, that is the reality. In today's world: The greater the dependence upon the IT infrastructure to operate the business, the greater the risk.

Business Valuation professionals should consider including cybersecurity due diligence as part of their valuation process. That due diligence provides: (a) a more accurate valuation of a business, (b) helps clients protect and increase the value of their businesses, for example. It also: (1) reduces the risk and liability associated with valuations that do not factor in cybersecurity, (2) helps increase the value of the Experts' practice, thus giving him/her a competitive edge.

Areas where cybersecurity risk could affect the valuation of a company are:

a- the discount rate through the company specific risk premium that is adjusted for cybersecurity risk

b- the cash flow that is adjusted to account for losses due to cybersecurity breaches

c- a direct adjustment to the value of the company

If a business cannot effectively defend its IT systems and data from attacks, then it is worth less than a business that can defend itself. It is the valuation professional's job to determine the impact of the cybersecurity risk on that business's valuation.

Case Studies

Target Breach, December 2013

In 2013, a cybersecurity breach of Target resulted in forty million credit cards plus an additional seventy million customer loyalty cards that were stolen. Target paid nineteen million dollars in fines and another $154 million in legal settlements. Their 2016 annual report said that total financial cost to the company was $292 million-less a $100 million cyber insurance payment.

The event occurred in 2013, and it is still not resolved; hard costs continue to accrue as of 2019. The stock price took a major hit immediately after the breach but has since recovered. This is because Target had major resources to respond to the challenge that a smaller enterprise would not have.

Verizon Purchase of Yahoo, 2013-2014

In 2013 – 2014 during Verizon's due diligence process in purchasing Yahoo, they accidentally discovered a breach of Yahoo’s systems. The personal data of 3 Billion account holders were exposed although no credit card info was exposed.

As a result of this breach, Verizon reduced the purchase price from $4.8 billion to $4.48 billion and demanded that Yahoo’s shareholders pay costs associated with remediation, loss of customers, business disruption, regulatory fines, legal costs, etc., and set monies on the side to cover retained liabilities associated with this breach.

The matter is still not resolved despite the sale that went through.

Recent Cybersecurity Breaches in the News

Capital One Breach

It was revealed that a hacker gained access to more than one-hundred million Capital One customers' accounts and credit card applications earlier this year. According to the bank and the US Department of Justice, the accused hacker, Paige Thompson, gained access to 140,000 Social Security numbers, one million Canadian Social Insurance numbers and 80,000 bank account numbers, in addition to an undisclosed number of people's names, addresses, credit scores, credit limits, balances, and other information.

Equifax Security Breach Settlement

In the same month, Equifax, the credit rating company, announced a settlement agreement with regards to its data breach, which occurred in September 2017. One hundred forty-seven million consumers were affected. Hackers were able to get access to a multitude of consumer private information, including names, Social Security numbers, dates of birth, credit card numbers and even driver's license numbers.

During the investigation into the breach, Equifax admitted the company was informed in March that hackers could exploit a vulnerability in its system, but failed to install the necessary patches. As part of the settlement agreement, Equifax will also pay $175 million in civil penalties to states, and a $100 million fine to the Consumer Financial Protection Bureau.

Conclusion

Cybersecurity is here to stay as a risk to businesses, and they need to find a way to mitigate that risk to protect and increase the value of their investment. Cybersecurity may now have a material impact on business valuation. While it is not necessary to be a cybersecurity expert, it is critical for small business owners to preserve their biggest investment from external attacks that could potentially destroy them. For valuation Experts, the magnitude of this impact can be determined by addressing cybersecurity risk in the management interview, the development of the value, and the reporting of that value. Business valuation Experts and business owners should now factor in this increasing risk and act accordingly.

If you have any questions about this article please don't hesitate to contact me using the information below.

Achille Ekeu, MBA, CVA

President & CEO

The Washington Valuation Group (WVG)

240-274-9570

achille.ekeu@washingtonvaluation.com

www.washingtonvaluation.com

Achille Ekeu is the President and CEO of The Washington Valuation Group (WVG). A small boutique firm located in the greater Washington Metropolitan area that focuses on the valuation of closely-held businesses for estate and gift tax, acquisition, sale, debt financing, start-ups, buy-sell agreements, divorce and partnerships disputes. He is an elected Board member of the National Association of Certified Valuators and Analysts (NACVA) and the elected State Chapter President of NACVA in Washington DC and Maryland.

Note: This article is based on an article published in the Value Examiner by Raymond Hutchins and Dave Miles, CPA, CVA, CGMA (July- August 2019) titled: Cybersecurity and Business Valuations: Increasing Value and Reducing Risk for Valuators.

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