Quarter One: Here we come.

I am composing this month’s column after opening the presents Santa left for me. All I can say is he must have enjoyed the shot glass filled with 30-year-old Scotch I left under the tree.

Also been wondering how you reacted to last month’s column which did not express much hope for 2021. Adding another six weeks of data to the thought process has not changed my mind much, and in fact, I came up with another risk or two that need attention.

After listening daily to numerous financial gurus I am intrigued by the consistent theme that “Your business will not be the same when we come out of this Pandemic period”. But upon pondering this question for a couple of weeks I am starting to put together a picture of what may change, why it will change, and how it will impact companies selling equipment, parts, and service.

So, what are the new threats I uncovered in the last six weeks? It has to do with an event that will prove negative no matter how your customer base performed for you in 2020.

It has to do with the Stock Market, and the bubble the market finds itself in the middle of a major RECESSION. How does that work? And I think we all know what is on the horizon. Think back to the late 1990’s or 2008-09 period.

Looking at some of the S&P Valuation Factors (and believing we are in a major recession) the factors are a little hard to believe.

  • Median EV to Sales         4.0
  • US Total Market Cap to GDP     170%
  • Median Price to Sales    2.8
  • Median Price to Book    3.9
  • Median EV to EBITDA      15
  • Average Price to Earnings    25

Think you could sell your company based on these factors and being able to fund the purchase debt. NO WAY!  The buyer could not get the financing to finance the deal because post-purchase cash flow would not support it. Another source covers 1945 to 2025 and calculates that the average PE ratio over this period is 17. But we are at 31 which is higher than all past bull market peaks during this period.

The risk here is we know what is coming in terms of a market correction. It is only a matter of time. The point is that even if you had a banner year because your customer base represented the right distribution streams or non-exempt companies, a major market correction (similar to the big ones in the past) will put all companies in a pinch. In other words, no matter how well you did in 2020 with the expectation to repeat in 2021, I would consider this market risk (very seriously) and avoid new major fixed commitments. So even if you were a high-flyer in 2020 you are not exempt from running different risk profiles to see how you would have to adjust if revenues fell by 50%. Dig out my prior column for additional risk analysis.

Now let us spend a few minutes considering how your company will emerge on the other side of the Pandemic. Think about it. Have your management team think about it. Because no matter how big or small your company is, or how profitable it was in 2020, there are changes coming you have no control of, and changes required to remain competitive meeting customer needs (which will also change) 18-24 months from now.

After considering the options available regarding the industry I see two trends resulting from this Pandemic period, caused by the new paradigm shift in the ways you did “Business” and the patterns developing in the industry forcing changes in the way dealers operate post Pandemic.

  • One is Technology and all the changes available therefrom
  • The other is changes in customer needs and the ability of current dealers to meet those needs

As a result of these shifts, two types of dealers will be created. The first looking like the status quo, who if they remain with the status quote will find revenues falling, margins decreasing and company value shrinking.

At the other end of the spectrum will be the TOP 25% dealers who will grow during this period, pick away at competitor’s customers, have much higher sales per employee numbers, higher margins from current revenue silos as well, and new revenue silos. And they will do this with manageable fixed costs, with the ability to shift the business model to meet customer needs and solutions to more than they are providing currently.

This latter group will embrace technology in all its forms, and as a result employ fewer people in most departments, except maybe in the service department depending on what services are being offered. Every transaction will be digitized where the system does the work with management reviewing the results in real-time.

We will get into this further next month.

TAX NOTE

Round 2 or PPP2 is on the horizon and after reviewing the first drafts of the program, it appears the amount available from the PPP2 would be similar to the PPP1 amount. There is a major difference, however. With Round 1 recipients filled in the application and received a loan. This time you need to prove you need it. What the publications state is if you have one quarter in 2020 that was 25% less than the same quarter in 2019, you qualify. This is tougher than it sounds.

There is also an SBA benefit available. If you are funding a business mortgage via the SBA you can receive a pass for three months (last I heard). Not sure how they will handle it, but you would get the break when you need it.

PPP2 forgiveness will be tax-free (this is what they said last time). And there is the noise that PPP1 will be tax-free, eventually.

See you next month.

 

Garry Bartecki is a CPA MBA with GB Financial Services LLC. E-mail editorial@mhwmag.com to contact Garry

Author: Garry Bartecki

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