Supply Chain Disruptions Will Impact Exit Values for CEO Founders in 2022

Supply Chain Disruptions Will Impact Exit Values for CEO Founders in 2022.

By Brett Dearing, CEPA, CM&AA

October 1, 2021

Anchored cargo ships hit an all-time high of 56 cargo ships waiting to get into the ports of California which is the fourth record backup in three weeks with an average wait time of eight days.

The World Container Index is now 370% higher than last year with container costs averaging over $10k per container versus the five-year average of $2k.

Business owners experiencing lower product margins and higher production costs could see a dramatic impact on revenues and EBITDA in 2022.

As a CEO Founder, what should you know about the supply-chain disruption?

Waiting cargo ships anchored outside key ports of Southern California hit an all-time high of 56 cargo ships waiting to get into port in mid-September, which was the fourth record backup in less than three weeks. Currently, ports in California are dealing with 140 total ships and an average wait time of eight days to dock according to the Marine Exchange of Southern California. 

Supply chain shortages and challenges have in part been caused by the pandemic and panic-buying that stressed the global supply chain to its limit during the pandemic. With additional stresses on ports in the U.S and around the world, delays, port congestion, and incidents like what happened at the Suez Canal won’t be the last challenge business owners will face. It is estimated, that supply chain disruptions might continue well into 2022.

As a CEO Founder, it will be important to start thinking about the long-term impact these disruptions can have on your business going into 2022 and create a strategic plan.

What are the short and long-term effects?

The short-term impact of the current supply strain has caused higher shipping costs and shipping time delays. Transit times have doubled from 35 days to now averaging 73 days. The World Container Index is now 370% higher than last year with container costs averaging over $10k per 40 foot container versus the five-year average of $2k. Additionally, positive covid tests by crew ship members, port employees, and continued covid restrictions have added to the short-term effects of higher pricing and shortages in inventory.   

These factors begin to paint a picture of longer-term effects on the global supply chain heading well into 2022. For business owners, the lack of readily available inventory and rising prices due to supply shortages could hamper the ability to service the post-pandemic consumer rebound before it cools. It is safe to say that increased costs and pricing are not likely to reverse course anytime soon.

The annual inflation rate for the United States is 5.3% for the 12 months ended August 2021, following two straight 5.4% increases, according to U.S. Labor Department data published September 14. The next inflation update is scheduled for release on October 13 at 8:30 a.m. ET. 

Covid Positive Crews Diverted to Indonesia

Additionally, positive covid tests by crew ship members, port employees, and continued covid restrictions have added to the short-term effects of higher pricing and shortages in inventory. 

The potential impact on business owners?

Disruption in the supply chain is having a profound impact on business owners ability to maintain operations, causing;

• an increased cost of goods sold,
• supply shortages in raw materials needed to manufacture products,
• additional stress to business models caused by the tightening of the profit & loss,
• and the beginning shift in consumer sentiment.

To protect margins and revenues, this spring business owners began passing pricing increases on to their customers begrudgingly with the hopes that prices would have peaked by late summer returning to some level of normalcy. As summer closes and all eyes are on the fall sprint to year-end, the next question is how to protect margins going into the new year and keep revenues trending in an upward direction. 

What do you do if you have a low-margin product?

In some cases, having a low-margin product is not a bad thing. It can be a good thing if it provides the opportunity to sell more volume. It becomes a problem when a high-margin product becomes a lower-margin product for a business, and it is not a high-volume product or service. This is where many businesses will begin to feel the effects of the supply shortage. 

Combining a lower margin product, higher costs, inflation, and waning product appetite by consumers could drastically impact revenues and the business values. This combination also has the potential of being the most devastating combination for a business owner coming out of a pandemic. Especially, if you do not have transparency into the day-to-day reporting of key factors impacting margins. Declining margins can be the first sign of difficult times ahead for a business.

Example:

If a company has a 20% profit on $10 million results in a $2 million gross profit. To increase gross profits to $2.25 million a company would have to sell 40% more or $15 million at a reduced price with 15% margins on sales. 

The trending problem is product pricing is going up due to costs and there may be consumer headwinds that could cause a slowdown in sales. 

How does supply chain disruption impact the value of your business?

Coming off a lower revenue year with margins shrinking and potentially having another year of lower revenues and EBITDA will impact the value equation for business owners for the next 2-3 years. And we are already starting to see the impact on current transaction values from potential buyers with more extensive due diligence, revenue analysis, and protective terms and covenants. 

Example:

If your business is currently doing $3 million in EBITDA and the multiple ranges of value is four to six times EBITDA, your value range is $12 million to $18 million. If your EBITDA decreases to $2.5 million in 2022 assuming the same multiple ranges of four to six times EBITDA, your business value will be estimated at $10 million to $16 million, which is $2million loss of value. So, what can you do to get ahead of this potential supply chain issue?

What should you be doing now to prepare for 2022?

Start your growth and strategic planning now. A good plan can take up to 30-60 days to fine-tune and another 30 days to implement. The planning for 2022 could be some of the most important planning business owners may implement since the ownership of the business. If you are thinking about selling over the next 3-5 years, 2022 financials will be a part of the due diligence package for a potential buyer. 

Small steps you can take today:

1. Have a business audit conducted on your business to prepare your planning process.
2. Where possible, renegotiate lower-cost vendor contracts
3. Evaluate your current product line and discontinuing less competitive products and/or services.
4. Try to anticipate how long margins will be lower. Forecasting margin trends will assist with a phased expense reduction strategy.
5. Adjust or add key performance indicators that track:

• Sales Revenue
• Units Sold
• Sale Price

Reasoning: If Units sold are trending down and the sale price is trending up, you need to have a plan in place to offset costs to maintain margins. It is a dilemma because if revenue is down, your EBITDA will also be down causing the value of your business to go down. 

If you have questions about your current operations or need assistance understanding your planning options, contact us today to schedule a brief call. 

Brett Dearing, CEPA, CM&AA