As we enter another hurricane season, many Florida business owners are still feeling the effects of the historic hurricane seasons of 2-3 years ago. While the damage to Florida’s commercial and residential property has mostly been repaired, the disruptions to normal business conditions for some South Florida businesses are still being felt. Anyone considering buying or selling a Florida business should carefully determine the "hurricane effect" when determining the fair market value of a business.
Strong Winds Produced Strong Sales
For many South Florida companies, the hurricanes of 2004-2005 were very good for business. In certain industries, companies experienced record sales and earnings in 2005-2006. Some industries that benefited most from the hurricanes include roofing, tree trimming, structural engineering, marine construction, aluminum screen enclosures and, of course, hurricane shutters.
The fair market value of any business is derived by estimating the present value of future earnings. Historical earnings are usually the best indicator, but what if past performance is not a guarantee of future success? When calculating the fair market value of a business, any "earnings bump" resulting from the hurricanes should be discounted. Since most businesses are valued using a multiple of earnings formula, every dollar in non-recurring earnings resulting from the hurricanes would typically correspond to a 2-3 times increase in company value.
The Calm after the Storm
Now that the reconstruction in South Florida is more or less complete, many businesses are facing an entirely different dynamic. The hurricanes created accelerated demand for some products and services, concentrating opportunity that might otherwise have been spread over a number of years. This has contributed to a rather dramatic 2007 slowdown in some affected industries. Just as excess earnings from 2005-2006 may need to be discounted, this type of negative "hurricane effect" must also be properly considered when arriving at a fair market valuation.
In hurricane-prone states like Florida, there is a greater need to go back and analyze five years of company financials rather than the customary three years. It may also be prudent to more evenly weight the financial performance over those five years rather than strongly weighting only the most recent year. Businesses should not be overly rewarded or penalized for fluctuations in financial performance still being experienced as a result of the 2004-2005 hurricanes.
The New "Normal"
As life returns to normal in South Florida, it is not necessarily "business as usual". The hurricanes have permanently impacted some industries and, in some cases, dramatically altered the marketplace. Some businesses may have better long-term prospects than others.
For example, the extensive damage to screen pool enclosures has resulted in engineering code changes that will make these structures more costly to build. The large number of recently replaced structures and higher cost of new construction may affect demand for screen enclosures in the years ahead. While demand for enclosures may never be quite the same, this doesn’t necessarily spell the demise of aluminum screen contractors. In fact, the capabilities and specialty license of these businesses create a natural platform for offering additional products like pool fences and accordion hurricane shutters – both of which are experiencing increased demand.
For the astute business buyer or seller, opportunity abounds in a dynamic and rapidly changing South Florida marketplace. The "hurricane effect" presents challenges in accurately valuing some South Florida businesses for sale, but a reasonable fair market value can be estimated if the past, current and future impacts of the hurricanes are all properly considered.
About the Author Ken Elkin is an experienced business broker and co-owner of Acquisition Experts LLC, South Florida business brokers. Acquisition Experts can help value Florida businesses for sale and structuring an acquisition that makes sense for both the seller and buyer. Ph: 772-220-4455.