Importance of Documentation during the Covid-19 Pandemic

It seems that every day, new information pops up regarding the severity of Covid-19 and new Government guidelines, regulations, and restrictions to control the outbreak.   

As consumers and business owners digest the news, the changing regulatory landscape, and evolving consumer behavior triggered by social distancing, it is becoming extremely difficult to effectively make business decisions.  To make matters worse, there is no clarity of duration.  Are we looking at a three week, three month, or three year recovery? 

As this relates to a business sale, only one thing is clear.  Most small business are being negatively impacted. Given that buyers and banks typically look at three years of financial history, even a short term disruption to your business can have a large impact on potential pricing and the banks’ willingness to offer loans to buyers in an acquisition.

So, what can you do to mitigate the impact to your future deal? Document, Document, Document.

The first set of documentation is to create a timeline of important events that are occurring in the news and around you.  This should start with the beginning of the Covid-19 pandemic and continue into the future.  When did your state or community realize there was a problem and begin changing their behavior? When did the state or federal government impose guidelines or restrictions that that would have an impact on your business? When were those lifted? What other events happened around the world that could impact consumer sentiment positively or negatively.  This documentation could include changes in monetary policy, fiscal policy, and news coming out of local communities and foreign countries, etc. 

The second set of documentation requires keeping accurate monthly financials.  It is likely that when buyers and banks look at 2020 as a whole, it will be off from 2019….possibly significantly.  However, the monthly trends will tell a much better story than the annual story.  Perhaps business is down 30% for the year, but during the last 5 months of the year the business grew month over month and is back to the same monthly revenue levels as prior to the pandemic.  Certainly a business owner would want to be evaluated based upon the monthly run-rate rather than the annual numbers.  This type of evaluation can only occur if owners use strict standards to make sure that revenue and expenses are being booked in the proper period.  For retail and distribution companies, it means keeping a strict handle on inventory levels so that COGS is accurate on a P&L.  For manufacturing companies, it means more appropriately tracking work in progress.  For service based companies, it means monitoring accounts receivable and making sure large payments don’t get booked in the wrong month.  For everyone, this means tracking pre-paid expenses and being able to identify expenses that may be made in one month but should really be amortized across a twelve month period to see the true impact by month.

The third set of documentation records your internal decision making.  What changes did you make to the business? If marketing expense gets cut or increased, when did those changes occur and in what marketing channel.  If there are layoffs or hiring, which positions were impacted? When were business hours changed or did employees began working from home or later asked to come back into the office full time?

For business owners that do not go through this level of detail, Buyers and Banks will be forced to look at long periods of time to get comfortable with business trends which is likely to negatively impact possible deals. 

However, should the story of the macro environment be congruent with what buyer and banks see in business decisions and monthly performance, it is far more possible that owners can get credit for the current state of the business rather than be penalized from events of the past. 

This guidance can be applied to owns looking to sell in any marketing environment, but is true now more than ever.