Capture the costs now before you forget them
When the day comes you want to talk with an investor or an acquirer, a key question asked about your profitability will pertain to the costs your business incurred in recent years that won't repeat once the new owners take over. This is what helps you arrive at the Adjusted Profit number for your company and it's often this number that the investor or acquirer bases their purchase valuation on. These costs are often referred to as "one off costs", "owner benefits" or "addbacks". The concept is that these costs get reflected in your net profit at the end of a year but because the new owner won't incur them, they should be added back to your historic profit performance to arrive at a higher or adjusted profit number. You don't want to find yourself having to think back over the prior few years to try and recall what these one off type costs were because you will forget some and this will only serve to help the investor or acquirer since the profit of your business is higher when adjusted properly but they won't be basing their valuation on what should have been a higher profit amount.
Now is the time to be remembering and documenting the costs your business is incurring due to this pandemic. This is a one off or perhaps once in a many year event so you don't want a few years to go by and having a dialog with an investor or acquirer and forgetting to adjust your 2020 profit to separate the one off COVID related expenses from the normal operating expense of your business. Here are a few ideas to get your thinking started:
- Lost productivity due to work stoppages (staffing shortages, employee meetings to discuss COVID matters)
- Purchasing of supplies (extra cleaning supplies above the norm, masks or gloves for employees)
- Cleaning staff (expenses above the norm in terms of more staff, overtime hours)
- Pricing discounts offered to help key customers thru the difficult time
Brainstorm with your controller/CFO to ensure you capture all COVID costs now and if you need ideas, speak with your accountant. Don't put yourself in the position of having to think back a year or more to capture every COVID related cost. Capture them now while fresh on your mind because doing so can mean receiving a higher exit valuation for your business when that exciting time is upon you. When it does, you want it to be filled with euphoria and not regret.
