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COVID-19: Business Owners- Are You Thinking About Selling Within the Next 3 Years? Do this Now!

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The spread of the Coronavirus Disease (COVID-19) is currently causing significant economic hardship to the United States and the world.
April 6, 2020

The spread of the Coronavirus Disease (COVID-19) is currently causing significant economic hardship to the United States and the world, the depths of which we do not yet understand. There is no doubt that as a business owner, you are being bombarded with information and have no shortage of concerns. Possible concerns could include understanding the CARES Act and how you might benefit, figuring out how to keep the lights on for your business, pivoting so you can capitalize on opportunities, and/or ensuring you safeguard the health of your employees and yourself. Not to mention, dealing with all of the concerns while having no idea what the world will look like after this is over. Well, we want to add one more item to your list, documenting the impact of COVID-19 on your business.

As a business owner, prior to COVID-19, you may have had thoughts of exiting your business. Perhaps in the near term due to historically high valuations, or perhaps in the next couple of years. Regardless, COVID-19 and its aftermath has no doubt affected how you are now thinking about an exit. While it is difficult today to determine where valuations might be or what the economy might look like post-COVID-19, there are things you need to do today to prepare for a potential sale.

As part of a sale process, a prospective buyer and its advisors will be looking to determine the normalized run-rate EBITDA of your business. This process typically looks at 3 years of financial results. Therefore, we will be dealing with COVID-19 adjustments and their effects for some time. It is in your best interest to make sure you maintain detailed documentation to support how COVID-19 has affected the earnings of your business. The best time to get all of this documented is right now. Maintaining detailed documentation will give you the best odds that you will get paid on those one-time items that hurt your financial performance. Without good documentation, the likelihood that you get full credit for those negative one-time items, goes down significantly.

So what types of items require documentation? Below is a list of common items that we are expecting to see as possible COVID-19 adjustments:

  • Declining sales: Many companies are experiencing some level of declining sales as a result of COVID-19. Maintain documentation on your lost sales, and be prepared to prove that those sales were truly lost, and not just deferred to a later date.
    • Note: Some companies are experiencing higher sales as a result of COVID-19. Expect to see a buyer attempt to normalize those sales down to an expected level of sales.
  • Supply chain issues: Many companies are having issues with their supply chain. Some have had to source material from different channels, often at higher prices.
  • Employee-related issues: Many companies have had to make decisions related to their employment levels. Some companies have had to furlough or terminate employees, some have employees working from home, maybe not as productive, and some companies have had to pay various severance amounts. All of these items should be thoroughly documented to allow a buyer to create a normalized income statement.
    • Specifically, as it relates to employee-related matters, you should be detailed. You should maintain payroll registers to be able to specifically document affected employees. You should also maintain a schedule of dates when employees were furloughed or terminated. The more detail the better!
  • Capacity challenges: You have likely experienced under-utilized capacity in your company. Certain costs are likely fixed and unavoidable. Additionally, if you are a manufacturer, you likely have overhead costs that have not been absorbed into inventory due to the decline in production.
  • One-time and unusual expenses: Companies are experiencing a myriad of expenses that are unusual and / or one-time for their business. These items are most easy to identify in real-time, so do it now.
    • Consider creating a separate trial balance account for COVID-19 one-time items, but make sure you maintain documentation to support all entries to this account.

The above list is not meant to be a complete list of potential adjustments, but to serve as a starter for you to think about how COVID-19 has impacted your business. We would encourage you to get in the habit now, of scheduling out all of the COVID-19 impacts on your business. You should be able to present an income statement that shows actual results, adjustments for COVID-19, and a proforma income statement that would show your business “as-if” COVID-19 never happened.

RubinBrown and our team of M&A advisors have significant experience in assisting companies through the sale process. We are available to help you now so you can best position your company to sell, whether now or over the next couple of years.


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