Business Owners & COVID-19? Do the Right Thing but Document!

Business Owners & COVID-19? Do the Right Thing but Document!

Matt Gilbert

March 23, 2020

Look, we’re in the throes of a legitimate COVID-19 / oil-price-induced panic! There’s no other way to describe it, and I’m of the opinion that, until an antidote and/or vaccine are discovered and widely available, the uncertainty will continue.

That’s just reality. But I’ve seen our business community’s resilience before. In fact, during my 30ish-year career, I can recall the term “unprecedented” being used in each of the following events:

  • 1987 - Black Monday stock market crash
  • 1991 - Desert Storm 
  • 1999 - Clinton impeachment
  • 2001 - 9/11 attacks
  • 2003 - SARS virus (originated in China – spread worldwide)
  • 2008 - Financial Crisis nationally and Hurricane Ike locally
  • 2009 - Swine Flu worldwide scare
  • 2014 - Oil crash
  • 2017 - Hurricane Harvey locally and MERS virus scare
  • 2018 - Flash crash (stock market participants only)
  • 2020 - COVID-19 and Saudi-Russia Oil Spat 

And you know what? Each time we survived! Therefore, my years of experience tell me that “this too shall pass,” although not without some serious carnage. The carnage may be in the form of wrecked corporate profits, jobs lost, and failures triggered by events completely out of your control.

In past events, I - and many of you - have made sure staff doesn’t miss paychecks, even when there’s little to no productivity. We’ve loaned money, time, and resources to individuals and good causes to “make a difference” in our communities, and we’ve used our business resources to generally “treat others as we’d want to be treated.”

As a business owner in times of crisis, “doing the right thing” will likely cause you to incur one-time expenses that have nothing to do with the routine operation of your business. This blog is about urging you to capture those one-time, extraordinary, and unusual expenses experienced in a time like this. Some examples might be:

  • Payroll for employees who aren’t working
  • Inventory (food or other) that expires or is donated
  • Extra time or overtime paid to employees to prepare for a shut-in/shutdown
  • Extra time spent in meetings and communications to prepare for/react to issues related to COVID-19
  • Expenses involved in setting up remote work environments including subscriptions to Slack, Zoom and other “virtual work spaces”
  • Cancelled travel, shipments, inventory, etc.
  • Many shipments of inventory and other goods may get stuck in ports or otherwise quarantined and not make it to their destinations - spoilage, missed deadlines, etc. all have a cost
  • Draws on your line of credit due to slow-pay or no-pay from accounts which are normally steady and predictable will result in unexpected interest expenses
  • Fleet vehicle note and insurance payments for equipment parked at the yard and idle
  • Medical expenses, screening, co-pays for any COVID-19 matters
  • Rent incurred for items trapped on jobsites (scaffolding, tools, etc)
  • Any other impacts on your time and resources

I could keep listing, but you get the idea. Adding a COVID-19 bucket to your P&L under “Other Expenses and Other Income (for government-related reimbursements or the like)” will allow you to clearly capture needed information. You can easily drop all expenses there for transparency in your accounting. For many, a journal or narrative will also be helpful in defending unusual hardships when scrutinized down the road.

Why go to all the trouble to document clearly? In the short term, if you need financial assistance (such as an SBA or other loan), you’ll want to prove all of this is not customary to the normal operation of your business. Also, if the IRS creates a relief package of some sort - which we believe they will - you’ll be ready for that. Example: You incur hardships of $50,000. The IRS allows for some tax relief but you can’t meet the burden of proof requirements for the full amount because you only captured and documented about $20,000. You will have missed out on $30,000 in tax relief.

Consider this as well: Let’s say you get the business stable again and 2 years from now, you decide to sell it. Let’s further assume that the buyer offers you 5x EBITDA (earnings before interest, taxes, depreciation, and amortization), but you are unable to include this $50,000 addback in your Adjusted EBITDA calculations because you did not properly carve out these expenses from your normal operations. This could reduce your selling price by 5 x $50,000 = $250,000. 

In this simple scenario, your generosity and decision to “do the right thing” but without proper documentation, cost you $280,000. The illustration could’ve gotten very complex, but hopefully you now see why properly capturing and documenting these expenses is so important. I urge you to “do the right thing,” but I equally urge you to ensure you can prove it when the need arises.

If you have questions about this topic or need help setting up a system to capture and defend your costs, we at GaP are here to help and want to extend a confidential, no-obligation conversation to anyone needing such advice or assistance.

You are the backbone of the American economy, and I want to see you prosper in all aspects of your business. Stay safe my friends.

About GaP Business Advisors

Gilbert & Pardue Business Advisors (GaP) is a Houston-based business advisory firm serving  lower middle and middle market owners from coast to coast through representation for Mergers & Acquisitions (M&A) and through business value-growth services such as Fractional CFO, Advisory Board, Executive Coaching, and Consulting.

Matt Gilbert and Bret Pardue established GaP to provide owners of  lower middle and middle market businesses – those businesses generally enjoying annual revenue of $5-$50 million – with the quality of M&A representation and value-enhancement services previously only available to middle, upper middle, and large businesses. GaP brings highly-experienced executives, sophisticated financial and marketing products, proven-effective processes, and fully-integrated expertise to every engagement. No other M&A firm serving the lower middle and middle market provides the quality of representation and transactional expertise that we do.

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