Outside Forces Effect the Value of Your Business
While – as I’ve written in several previous posts – there are many things you can do to increase and maintain the optimum value of your business, those efforts are sometimes offset by events that are not always under the business owner’s control. Technological advances and competitor’s moves are, of course, things that most business owners keep an eye on and you can usually react to such market changes by adapting your own business to meet or counter these changes.
For example, Amazon and Alibaba have changed the retailing landscape around the world. (More on that in a minute.) And you may remember that, not too long ago, when Walmart announced it was opening a store, stories in the media were almost universally heralding the demise of local merchants.
I have a home in a rural waterfront area that I cherish for its tranquility and civility. In 2010, a Walmart opened amidst great media angst (and the occasional main street protest by residents that didn’t need Walmart but now shop there weekly) that all the locally-owned business were going to be forced to close. Aside from one or two that were destined to close anyhow (crummy service, irregular hours during fishing season, etc.), it didn’t happen. They adapted. They improved service levels, began offering products that Walmart did not, modified their marketing to attract the customers that wanted a shopping experience that was several orders of magnitude better than what Walmart offers. (For an extremely clear example of this, spend four minutes here.)
In short, business owners – whether they be small retailers, major manufacturers, national service providers or almost any other type of business – can usually adapt and counter these normal business trends and cycles. There is one source of change, however, that is in many cases very difficult – and occasionally impossible – to counteract and it can decimate a business’ value. That source is government.
The Rules Get Changed
Governments at all levels impact the value of businesses – to greater or lesser degrees – in their jurisdictions every day. They do so consistently, many times repeating the same idiotic mistakes that even a 10th-grader’s brief review of recent economic events – let along the application of a modest amount of logic and reason – would rule against; unless, of course, the particular government body’s objective was to phase out the existence of certain businesses.
Here are a few examples of a few examples of government lunacy that significantly impacted the value of thousands of businesses.
- In 2014, Chicago’s city government, in an attempt to restrict the availability of weapons and ammunition, passed strict limits and controls on firearms dealers in the city, immediately lowering the value of gun shops and firearms training centers in the city limits – and just as immediately increasing the value of those same businesses just outside the city line. This had the added “benefit” to the city of decreasing the amount of tax collected from such businesses because sales fell through the floor.
- In 1991, the US Government enacted a “luxury” tax that was assessed on private purchases of luxury boats, airplanes, jewelry and luxury cars. The immediate effect included a complete collapse of boat and jewelry sales in the US (with a concurrent spike in other countries) and the near extinction of the small plane industry in the US. The added benefit, as notes above, was that tax receipts dropped precipitously given that almost no luxury boats, jewelry, furs, planes or other “luxury” items were being sold any more, at least domestically. Hundreds of US companies closed or moved off-shore. The carnage got so bad that, in a once in a lifetime event, the US Congress actually repealed this moronic law two years later. But the damage was done. All the businesses that fell within the law’s purview lost value immediately, regardless of how hard the owners of those businesses had worked to build value.
- Seattle, among other liberally-governed US cities, is in the process of raising the legally-mandated minimum wage to $15 per hour. The pros and cons of this move can be debated at another time but the impact on the value of businesses within the city will be significant when compared to similar businesses just outside the city. Businesses in the city will have to charge more to cover this additional cost, a step that will put them at a competitive disadvantage to businesses outside the city as customers seeking the best value change their behavior and buy from the lower-priced competitor that is not impacted by this law.
- Back in Chicago (of course), another hair-brained idea was to impose a tax on soda. Needless to say, soda sales in the city cratered with soda sellers in Northwest Indiana experienced a windfall as many Chicago residents headed over the state line in pickup trucks and cargo vans to stock up. From the Economist: “When it… went into effect the levy was met with obstinate public opposition.” “Some (residents) drove to nearby Indiana to stock up on the fizzy stuff.” “And it did not raise as much revenue as forecast because some restaurants and retailers sold almost 50% fewer fizzy drinks.” (And people being entrepreneurs, many of them bought FAR more than for personal consumption and started selling the excess which, of course, reduced sales in the city even more – resulting in less and less tax revenue. Imagine that!)
- Another example is from our own archives. A client of ours opened a small beer, wine and tobacco store on a Virginia highway, just before it enters Maryland. In 2008, the good legislators in Maryland in their infinite wisdom (or lunacy) deemed the tax on tobacco products was too low and decided to double it. (Think of all the added tax revenue!) Tobacco sales – and, in a surprise to no one not working for government, tax receipts – promptly collapsed and sales at our client’s store doubled and have climbed every year since. The value of dozens of tobacco retailers in Maryland within 30-40 miles of Virginia shrank and the value of similar Virginia stores rose, even before the tax took effect.
The value of your business depends on many things, most of which you can control. If you pay attention to your business’ “value drivers“, you are likely to obtain the highest value for your business when it comes time to transition out. But when the rules get changed, it’s another matter altogether and one that is difficult to prepare for or counter.
Consider the first Chicago example mentioned above. You might say that the owners of gun shops and firearms training centers in Chicago could all have moved out of town. But imagine the owner of a store that has been in the same location and serving the same local community for 20 years. Moving would essentially be starting all over again.
The soda retailers and restaurant owners had NO choice. They simply watched as the value of their business slipped no matter how faithful they’ve been to the task of building value.
The minimum wage increases planed for many cities will, among other deleterious effects, reduce the value of businesses in those jurisdictions, at least in relation to their competitors outside.
And, finally, Virginia tobacco shops within an hour’s drive of Maryland will enjoy a value premium over their competitors in the Old Line State for a long time to come.
Back to Amazon…
At the beginning of this post, I mentioned Amazon and Alibaba. There was an excellent article in the Wall Street Journal recently (December 2017) about how retailers can not only survive but thrive in our brave new world of Amazon and Alibaba. Because the Journal requires an account to access, I am unable to provide a link. However, if you’d like to receive the article directly to your inbox, tell me and it’ll be on its way.
If you have any questions, comments or feedback, I want to hear from you. Put them in the Comments box below. I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a profitable week!