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Where Does Your Company Place Value?

March 3, 2020

According to a recent Reuters Report, U.S. retail sales fell more than expected in August amid weak purchases of automobiles and a range of other goods, pointing to cooling domestic demand. Additionally, the Commerce Department said retail sales declined 0.3 percent after edging up 0.1 percent in July. Sales were up 1.9 percent from a year ago. Excluding automobiles, gasoline, building materials and food services, retail sales slipped 0.1 percent last month after a similar drop in July.

Well, most of the food industry is facing profit pressure from continued food price deflation. This is not news to those operating in this environment. Many food retailers and wholesalers are struggling to make budget, as well as make money. We see and hear mixed reports regarding the health of the economy – who are the winners and who are the losers? That is a debate that will continue well beyond the presidential election. Yet, the fact remains company valuations have suffered over the past few years. Additionally, there is an uptick of interest in food retailers from private equity groups. Merger and acquisition activity will continue to be at a brisk pace.

Additionally, on August 2, 2016, the Internal Revenue Service (IRS) issued long-awaited proposed regulations under Section 2704 of the Internal Revenue Code. If adopted in their proposed form, these regulations would eliminate most or all available discounts for minority interests in family-controlled entities, including corporations, partnerships, and limited liability companies (LLCs), for federal gift, estate and generation skipping transfer tax (collectively, transfer tax) purposes. These new rules will apply not only to passive companies that hold a portion of the family’s investment portfolio but also to operating businesses. A public hearing on these proposed regulations is scheduled for December 1, 2016, after which the regulations may be finalized at any time. Some of the regulations take effect for transfers occurring on or after the date of their finalization, and some take effect 30 days after finalization. Selected transfers occurring prior to the date of finalization might be subject to the regulations under the newly proposed three-year rule. Some in the planning community believe there is a significant likelihood these proposals could be adopted shortly after the public hearing. Are you prepared? Have you reached out to a financial planner and an expert in succession planning?

So you say what does this all mean? At Allen Austin, we believe this is when you continue to invest in your people, ensure your culture is effective and evaluate your leadership team. This deflationary period shall soon pass. We feel those companies that continue to improve their fundamentals, culture and leadership team – will be a company poised to reap the fruits of their organizational discipline. Moreover, for those that may want to test the private equity market – that is what the top private equity firms look at……balance sheet; cash flow; overall valuation; management team effectiveness and depth; and an outstanding leadership team – which includes succession planning.

For those readers that own their business, your active role to improve some of the aforementioned fundamentals will undoubtedly improve your valuation. We continue to see many organizations that simply do not work. Unfortunately, we see an increase in companies that underperform, with their leaders underachieving. Just look at the business news recently. Big and so-called sophisticated organizations have simply failed and underperformed – with not much of a future. Sears/Kmart is not alone. Target is struggling with their food offering, more importantly still searching for a strategy. These pitfalls can be avoided.

Too often employees do not get assessed fairly and the best people for the job rarely get hired. We urge you……readers and leaders to increase your investment in the development towards achieving a world class organization. We have provided leaders with a visceral understanding of how crucial their value system is in motivating, galvanizing, and energizing people to achieve the great results they are under so much pressure to produce, and how to achieve these results without violating people’s need for dignity and respect. Although the economy is limping along, most companies remain optimistic and have resisted downsizing.

With competitive, pricing and regulatory pressures, the food industry will continue to face change and challenges. As my entire career has been in this vibrant and exciting industry, I know that continued and sustained organizational improvement is critical to success and survival.