Wayne Wilson on Companies in Transition

Brexit: a "test case for deglobalization"?

"...Britain outside the European Union will be less competitive. It will henceforth have to consume less and export more of what it makes. A lower currency and higher interest rates will bring that about....Brexit is thus turning out to be a useful test case for deglobalization."

-Greg Ip, in the WSJ

As the news media has recently reported, the case for Britain heading for a "hard" Brexit is growing. Whether the outcome of such a path will be good or bad for Britain in the long-run does not eliminate the need for companies doing business overseas to continually evaluate the political and economic risks emanating from each of the countries in which they do business.

The rules for business success are changing. Best to get prepared by:

• remaining vigilant for the trail signs of impending change
• improving operational and financial flexibility
• preparing to seize the new opportunities which volatility inevitably brings

Do Wealthy People Like Trump Have Easier IRS Audits? Maybe/maybe not

While focused primarily on high income taxpayers, Wood's advice is applicable to many taxpayers facing an IRS audit.

http://www.forbes.com/sites/robertwood/2016/10/04/do-wealthy-people-like-trump-have-easier-irs-audits/#222891e821ce

As always, seek professional advice for your particular circumstances.

Moving to rolling forecasts

“The biggest problem with most traditional budgets is that they’re based on a bunch of assumptions....  Assumptions about what the economy’s going to do, assumptions about future competitive actions, future customer actions, governmental actions, regulation, currency movement, a whole series of things, the vast majority of which are outside the control of the organisation.

“And when those assumptions turn out to be wrong, the plans based on them pretty much are wrong, too.”

- Steve Player quoted in Boot the budget? Why rolling forecasts might make more sense

I have been advocating for six-quarter or eight-quarter rolling budgets for years - mostly falling on deaf ears. "It's too hard." "It takes too much time." "We would be doing budgets all the time, and we barely survive budget season now." These are some of the typical responses I hear.

When business is steady and operations straightforward, budgeting is a wonderful thing (well not quite). But when markets are choppy, sales volatile, or financing sources skimpy or non-existent, annual budgets can become boat anchors if managers continue spending resources based on their "budgets."

For many companies, planned annual revenue growth has become hard to achieve, often due to factors beyond their control. Some companies are relying on semi-annual "re-forecasts." For others, those re-forecasts have become quarterly events. Rolling forecasts have frequently become necessary just to survive.

Better to be nimble by adopting more flexible budgeting/forecasting processes while training your managers to understand that spending budgets are preliminary guidelines, not authorizations to write checks.

Each significant expenditure or new personnel hire should be scrutinized to ensure that the expected activity is likely to generate a business result consistent with the company's current business plans and market expectations.

And don't forget that your compensation plans need to be aligned with the volatile operating environment. If bonuses are based solely on annual business plans which are never met, employee morale will suffer. Owners, CEOs, and board of directors have a tricky task in developing motivational incentive plans while remaining responsive to the current public hue and cry for "pay-for-performance" compensation programs.

Congress "finally" passes fiscal cliff act

Congress passes fiscal cliff act

 

By Paul Bonner and Alistair M. Nevius

January 1, 2013

"Pulling back from the “fiscal cliff” at the 13th hour, Congress on Tuesday preserved most of the George W. Bush-era tax cuts and extended many other lapsed tax provisions."

Continue reading at the Journal of Accountancy for a summary of the bill's tax law changes.

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Read commentary from Bob Bixby, the Executive Director of the Concord Coalition at - http://tinyurl.com/b98btzd

Are you creating value or destroying it?

Business owner/CEOs intent on creating value for their shareholders often engage in a variety of “value-enhancing” strategies. Some of those strategies involve being in the right place at the right time; some of them work; some of them don’t; and some of them are just plain death defying for their businesses.

In a recent article, Marty Wolf, president of Martin Wolf Securities, pointed out several of these value destroying techniques, which are unfortunately all too common:

1. Opportunistic acquisitions

2. Growth for the sake of growth

3. Weak balance sheets

4. Convoluted ownership structures

5. Missing the window for a liquidity event

Is your business at risk because of one of these?

Read Marty’s article.

Cash will always be king, queen, and crown prince

Financial accounting and reporting have become far too complicated and opaque, which is one of the reasons the Financial Accounting Foundation (FAF, the overseer of the FASB or Financial Accounting Standards Board) has approved the formation of a new Private Companies Council to set differences in U.S. generally accepted accounting principles (U.S. GAAP), where appropriate, for privately held companies.

Today's financial accounting often places too much importance on fleeting, point-in-time determinations of "fair value" which may have little or nothing to do with the ultimate realization of, or ability to pay out cash.

There are really only three questions about an asset that matter:

1. Can it be converted to cash?
2. When can / will it be converted to cash?
3. How much cash will there be when the dust settles?

The same can be said for liabilities or obligations:

1. Will cash be required?
2. How much? And
3. When?

Owner/CEOs could benefit from a tighter management focus on their sources and uses of cash: what do I need cash for and where will it come from?

Borrowers and Lenders

An article in today’s New York Times [1] pointed out the price savers are paying through lower income on their savings as a result of the Federal Reserve’s near-zero interest rate policy. Not only does this policy favor borrowers, it clearly favors banks (at the expense of their depositors) amid the banks’ efforts to rebuild capital and profitability.

Such low rates will be counterproductive, however, if carried on too long in an era when consumers, businesses, and banks must de-leverage to right their balance sheets. Consumer spending, especially, ran way out on the proverbial debt limb. That limb has now broken off, and consumers are scrambling to survive the fall. In fact, the lower the interest rates, the more consumers must save and the less they will spend.

If you are a borrower with good credit and equity support, these are some of the best of times with home mortgage and corporate bond interest rates at record lows.

If you are a net saver, your investment options are poor, bad and worse. Bond yields are low and stock prices stagnant. Hard assets (gold, real estate) may look attractive but low/no inflation or out-right deflation are seldom kind to such assets.

How should owner/CEOs think about their companies’ strategies in this kind of environment?

It’s a time to be cautious but opportunistic:

• There will continue to be winners and losers – The continuing success of Apple’s gadget sales demonstrates that consumers will find the money to buy the things they want. Companies with second-rate or me-too products will likely continue to struggle.

• Nothing lasts forever – Just as the good times came to an abrupt end, the current malaise will also improve but over time. Any sharp economic improvement will require significant catalysts in the form of major innovations and/or dramatically more favorable governmental policy. Look for inflection points; be ready.

• You make money when you buy or invest, not when you sell – While there are “get lucky” exceptions, most investment returns result from buying the right assets at the right price. Be patient. Liquidity is your friend, not your enemy.

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[1] “Falling Rates Aid Debtors, but Hamper Savers” at http://www.nytimes.com/2010/09/09/business/economy/09rates.html

Banking on banks?

Banking on banks could be hazardous to your health. A recent article in The Economist [1] reports new data indicating that small businesses are a drag on the employment rebound from the recession. Large firms have resumed hiring but small firms continue to shed jobs.

The culprit? According to The Economist, one of the biggest causes is tight credit. With banks still skittish about bad debts, only the most credit-worthy companies can qualify for new loans to expand their businesses – and hire more employees.

While lack of credit is a likely cause, subdued confidence in the future is also at work here. Entrepreneurs and other business owners are almost by definition optimists – who else would take the risks? But investing for the future also requires confidence in a stable business and economic environment. Such confidence has been in short supply.

Continuing upheaval in global financial markets, impending increases in government healthcare mandates, business regulation, and tax rates do little to inspire confidence that investments made today will result in reasonable prospects of returns on those investments in the future.

In this environment business owners must:

• Carefully evaluate current and future market opportunities

• Develop business plans based on conservative financial assumptions

• Establish and guard rainy day funds and backup lines of credit as if there business lives depended on them (which they might)
  

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[1] May 15, 2010, p. 38

What’s your business worth?

Every business owner dreams about what his/her business might be worth – the bigger the dream, the better they feel. But what is that business really worth? Only as much as someone will pay you for it.

Here then is the real question: how do you figure out what someone might pay you for your business? Investment bankers would say, “Let’s run a process (quietly put the business up for sale) and see who comes and what they offer.” But that’s not practical if you are really not yet ready to sell or if you are worried about the impact on customers and employees if word leaks out that you are shopping the business around. Such processes can also be time consuming, distracting for management, and potentially expensive.

Another avenue is to ask an investment banker or appraisal professional to prepare what’s called a “range of values” study based on comparable company sales, public company trading multiples, and discounted cash flow analyses. Such studies can provide you with indications of your business’ value under various scenarios. The fees charged for these studies may be modest or significant depending on the size and complexity of your business.

And then there are the “rules of thumb” – those quick and dirty formulas for estimating the value of a business based on the ranges of prices other people have paid for similar businesses over time. [1] To be useful, business valuation rules of thumb should be market-driven, that is the result of actual sales. While valuation rules of thumb do not take into consideration all of the factors which might affect the value of a specific business, they are a useful starting point.

Here are two good resources to consider in your search for appropriate rules of thumb:

• 2010 Valuation Survey of Architecture, Engineering, Planning & Environmental Consulting Firms, published by ZweigWhite is an excellent resource for business owners and managers in those professions.

• For a more general resource, check out the 2010 Business Reference Guide: The Essential Guide to Pricing Businesses and Franchises, 20th Edition.

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[1] In the Introduction to his book Rules of Thumb, Tom Parker calls a rule of thumb “an easy-to-remember guide that falls somewhere between a mathematical formula and a shot in the dark”.

Managing Business Risks

The first risk management problem for both executives and directors is identifying the risks they need to be worried about. Some of the biggest problems are stealth risks – they seem to come out of nowhere.

At a recent seminar for corporate directors, the seminar leader, Dr. Krishna Palepu of Harvard Business School, suggested the following matrix as a good place to start.

Types of Risks

- Strategic – did you pick the right strategy?

- Execution – can you effectively execute the strategy you picked?

- Reputation – how could your corporate reputation be damaged?

- Compliance/Fraud – something bad happened; will it be caught in time?

- Legal – regulators, customers, etc sue the company.

Sources of Risks

Internal

- Pressure to perform – the hill is too high

- Incentives – the compensation system encourages inappropriate behavior

- Rationalization – people have a unique ability to convince themselves that what they are doing is okay when it is not.

External

- Competition/markets – aggressive competitors or changing markets

- Regulatory changes – someone changed the rules or the level of enforcement

- Technology – new technologies make what you are doing obsolete

- Society – the larger society decides it does not like something you are doing

While not exhaustive, the above lists can point you in the right direction.