Faced with continued lockdowns, uncertainty around upcoming waves of Covid-19, and external factors that seem to put our economic outlook on a rollercoaster ride, we press forward hoping that our businesses will remain the same.
Unfortunately, this is not likely the case. Here are five reasons why your business value may be dropping, and one little-known trick to reverse that trend.
Understanding Business Value
There are many ways to value a business.
While the investor or institution that’s looking at your business will review different factors, the most common forms of evaluating an SMB (Small Medium-sized Business) are as follows:
- Market Based – either determined by how much revenue is generated by your business, or by how much profit is made in your business? In both cases we factor in a multiplier based on the valuation of other companies in your industry (for example 2x-6x) and end up with a rough estimate of your business value.
- Earnings Based – here you’d be taking a discounted cash flow analysis of your future earnings, and bringing it to the present value. This is an estimate of what you think the business will make in the future, brought to a value today.
- Asset Based – one of the most common forms of business valuation weighs heavily on your business Balance Sheet. Banks typically assess your business in this way when you’re looking for business loans or capital to grow your business. Investors also take this into consideration when looking at your overall business value, even if they are using one of the previously mentioned revenue or profit multipliers. To assess the book value of your business you subtract your liabilities from your assets. The final value is the value of the assets in your business.
Unfortunately, regardless of how you plan on evaluating your business, your business value is likely dropping. Let’s first look at why, and then explore a little known trick to help your business mitigate some of the external pressures that are reducing your business value.
The Market Is Changing
Covid has drastically changed the landscape for small business owners. Retail and restaurant businesses have been heavily restricted in opening hours. E-commerce shops have faced setbacks with shipping and logistics. Service-based businesses have been hit hard by market closures.
Regardless of your business, negative market forces will typically affect your business in a negative way.
An estimated 1 in 6 small businesses in Canada have been thinking about closing, The Canadian Federation of Independent Business has said. As Canadian’s face upcoming waves and Covid variants, the looming threat of continued business restrictions remains a damper on business development. This does not bode well for business valuations.
Your Customer Base Is Shrinking
Tied closely to lockdowns, a shrinking customer base is every business owner’s worst nightmare. Customers are the lifeblood of every business. Without them, your business is, well, just an idea.
As Covid has shifted customer’s purchasing habits, moving a greater portion of spending online, businesses that fail to adapt accordingly will continue to see their business value eroded. Stats Canada estimates that while retail sales fell by nearly 20% in 2020, e-commerce sales approximately doubled. This is visualized by the graph below.
While your customer base may be shrinking due to external market forces, it is worth noting that this does not mean that customers have completely evaporated. It simply means that you’ll need to heavily shift your business strategy, to find new customers, and keep existing ones if you want to keep your business valuation at pre-2020 levels or higher.
You’re Not Keeping Up With The Latest Consumer Trends
Consumer trends shift and adapt depending on a variety of factors. Sometimes these shifts are slow and methodical and span years or decades. This was the case for a trend such as online shopping. Other times these shifts are quick and near-instant, such as forced country-wide lockdowns and a near-instant global shift in the world’s supply chain.
As a quick example, with the near-instant change in consumer trends over 2020 has your business is done all it can to move some, or all of your products or services online? Have you considered not only what to move online, but how your customers will discover your business?
You’ll need to keep up with both purchasing trends and discovery trends as the business moves forward in an uncertain time. If not, your business will continue to lose value.
Your Liabilities Are Increasing Faster Than Your Assets
This unfortunately goes hand-in-hand with the previous points. As the market adapts, you may have found that the essentials your business needs to operate have increased in both price and quantity. This compounds the effects of a shrinking customer base. You’re now forced to spend more to service fewer and fewer customers.
The impacts are further dramatized when consumer trends move quicker than you’ve anticipated, and your business has not kept up with rapidly changing preferences.
But maintaining your current asset-to-liability ratio is just a piece of the puzzle. As inflation starts to impact our society, you’ll likely notice that the value of the money your business makes, simply does not go as far.
This means that unless you increase your prices to improve your asset-to-liability ratio, your liabilities will continue to increase as it will cost you more and more to provide the same products and services to your customers.
The Value Of Your Dollar Is Decreasing
An unfortunate but very real impact of the Covid lockdowns has been that governments around the world have needed to print money to keep the system afloat.
As an example, the Bank of Canada has stated that “even with a low inflation rate of 2%, the dollar will lose ½ its value in 35 years.”
While the verdict is still out, experts estimate that our short-term inflation rate might range anywhere from 3-10%. As the Wall St. Journal shared in a recent article, investors were shocked by the 0.9% month-over-month inflation rate in April of this year. This, if continued, would peg annual inflation at an astounding 10%. To put this in perspective, a 10% inflation rate would mean that the value of your dollar would be worth approximately 50% less in just 4-years.
While it’s highly unlikely inflation will continue at such a staggering rate, It’s extremely important to consider that every dollar that your business brings in, or that your business saves in cash reserves, will lose some of its value over time. You’ll need a strategy to ensure your business continues to grow and thrive in uncertain economic conditions.
One Little Known Trick The Best Companies In The World Are Using To Offset Lower Business Value
There is one factor listed above that compounds the effects of the previous four factors. This is: The value of your dollar is decreasing due to inflation.
If you don’t have a plan to combat inflation in our current economic environment, your business will continue to lose value by eroding dollar value alone. This is not a trivial amount. A 50% reduction in the purchasing power of your dollar in 8-years would mean you’d need to spend 50% more of what your business makes to keep your business afloat. This is assuming there are no other increases in operational business costs.
Their asset of choice? Digital assets such as Bitcoin.
By moving a portion of their cash reserves to an asset that combats inflationary pressure, these businesses reduce their exposure to eroding business value, by not holding excess cash that continues to lose its purchasing power.
It’s a trick that some of the most successful companies in the world have started to use and is a strategy that’s available to any small or medium-sized business in Canada.
There are many external factors that cause your business to lose value. Succeeding in our uncertain economic environment will require:
- A reassessment of your business and general business strategy
- Keeping abreast of the latest in consumer and market trends
- Having a plan to combat inflationary pressures that compound all other factors
Post-pandemic has shown us that smart companies are pivoting their business strategy and adding Bitcoin to their balance sheet to combat inflation and prevent further reductions to their business value.
Have you considered how to do the same?
Trisha Paguyo leads Bitbuy’s Corporate Accounts Team. As an ex-Senior Financial Analyst at CGI, she transitioned to the cryptocurrency space with one of the leading crypto exchanges in Canada – recognizing the massive potential of the industry.
Now she leads BitBuy’s Corporate Accounts Team, guiding other SMB’s into the world of cryptocurrency, highlighting how they can safely reduce risk, gain exposure, and minimize the impacts of pandemic inflation with the fastest growing financial asset in the world.