COVID-19 and small business owners

CPA Mark Goodfield (aka The Blunt Bean Counter), says COVID-19 made many owners aware of the impact a ‘black swan’ event can have on the value of their businesses.

Has the impact of COVID-19 on your financial affairs got you feeling like this about your retirement plans?

Not to assume that I speak for all my readers, but my guess is that many of you are feeling like I do—knocked off kilter by limited social interaction, restricted working conditions and the disconcerting feeling of watching your retirement savings dwindle and finances sag.

I have not even mentioned the most serious issue, health. You or a family member may have contracted the new coronavirus. And if you have managed to avoid it, you may still be concerned for yourself and your loved ones, some of whom may be especially vulnerable.

■ Financial concerns

The financial concerns because of this virus are real. Whole industries such as travel, entertainment and oil have been hit extremely hard. Financial transactions have slowed or ground to a halt in certain industries. The economic tools needed to fight this virus will impact many, if not all, businesses. Some will bounce back quickly, others more slowly.

We are impacted as employees, small business owners or retirees vis-à-vis the security of our jobs, the stability of our businesses and how we fund our retirement (with retirement funds down 10 to 30 per cent depending upon your asset mix, in a matter of weeks). The anxiety we all feel is rooted in a reality that will not be fully measurable until the virus recedes and normal life resumes. But normal life will eventually resume, and we can take action, now and in the future, to put us in the best position to rebound from the financial challenges of this pandemic.

I have received various questions from individuals and business owners. I will address those questions below.

■ Individuals

Individuals have asked me two questions in particular:

1. Should I reduce my equity exposure to limit my stock losses?

2. I am near retirement. Should I delay my plans?

■ Equity Exposure

In a perverse way, COVID-19 has forced many of us to learn about our risk tolerance and ability to handle the volatility of our current investment allocation, namely that volatility is often correlated to the level of equity we hold. If you cannot sleep at night with your current equity or investment allocation mix, then maybe you have too much investment risk and you need to speak with your investment advisor.

This discussion should revolve around whether your equity allocation truly suits your investment objectives and whether the potential volatility of your equity holdings is appropriate for your risk tolerance, now that you have been on the roller coaster ride and can quantify your risk aversion.

You will have noticed I have not directly answered the ‘should I reduce equity’ question. That is because (1) as an accountant I cannot provide investment advice and (2) the answer is really based on your risk tolerance and other factors specific to your own situation.

As a side commentary, while a requirement of the investment industry is to determine a client’s risk profile and create a portfolio that suits that profile, I would suggest this risk determination is often superficial. Most of us do not understand our true risk tolerance until a situation such as the markets’ rapid reaction to the virus knocks your portfolio down 25 per cent in a matter of days.

The better investment managers I deal with not only determine your risk tolerance through an interview process but also back-test your tolerance for that risk over the markets for the last 30 years or so. They do this before they invest your money. It would be interesting to see who has been more stressed recently, those with risk tolerances determined purely by questionnaire and discussion, or those who also back-tested before they invested. I would guess the latter.

■ Retirement Plans

It may or may not be too early in this ordeal to alter your retirement plans. While sequence of returns technically deals with your investment returns when you start retirement, the reality is that whether practically or psychologically, this significant drop in our retirement savings could impact the right moment to start our retirement.

There is no one-size-fits-all answer to this issue as it will be very fact specific. If you have a pension from your job or some other anticipated flow of funds in retirement, a stock market decline may not be a large longer-term issue, assuming that the market bounces back at some point like it has done historically.

However, if you were going to draw on your retirement funds immediately upon retirement, the reduction in your nest egg in this bear market could severely impact your retirement plans.

My suggestion is that once things settle down, you review your plans (including the preparation of an actual financial plan or a review/update of an existing plan) with your financial planner, financial advisor or accountant. You will then have an objective valuation of whether your retirement date may need to be pushed back a year or two.

■ Small Business Owners

Small business owners face a whole bunch of concerns sparked by COVID-19 that employees don’t need to manage. These fall into both short- and long-term buckets.

Short-term concerns

Short-term practical concerns include items like how you manage your cash flow, whether insurance will cover any of the lost profit or expenses and the business owners’ employment responsibilities.

Colleagues at my firm who deal with preparing insurance claim reports have informed me that there is no standard answer to whether a company’s insurance coverage will cover any of their losses due to COVID-19. Each claim will come down to the specific wording of the policy and how that policy deals with such terms as ‘pandemic’, ‘infectious disease’ and ‘business interruption’. A legal interpretation may be required in many cases.

The employment law questions are complex and unique in this current situation and I tell my clients they need to talk to their employment lawyer.

Clients are also asking if Ottawa or provincial governments will provide aid to help keep their businesses afloat. This is a fluid situation. The feds have announced a robust stimulus package. The provincial and territorial governments may also chip in to help their constituents.

Longer-term concerns

As discussed earlier, certain industries and businesses have been hard hit by the economic slowdown caused by the virus, and almost all businesses will suffer to some degree—Netflix and Amazon are likely two of the high-profile exceptions. For a couple of the business owners I work with who have been considering selling their business, this sobering event has crystallized the risk of focusing their retirement plans on one major asset: their business. This is known as concentration risk.

They have now come to realize that almost any type of business could be severely impacted by a black-swan event such as COVID-19. The risk to their retirement is significant if the concentrated business asset loses value due to an unanticipated event, especially close to their retirement date.

I think once the dust settles, some business owners may get very serious about the process of getting their business ready for a sale, whether in a year or over a couple years. As part of that process, they may undertake a value-enhancement process to increase the sale price. They will do so by taking the necessary management, technological and other steps to become more attractive for a buyer.

This article provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisor.

This is an edited version of an article that was originally published for subscribers in the April 2020, issue of The Taxletter. You can profit from the award-winning advice subscribers receive regularly in The Taxletter.

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