Employee Communications and Involvement in Tough Economic Times/Declining Valuation Multiples

The Economic Downturn: What Does It Mean for Employee-Owned Companies? discusses issues that employee owned companies will face during the current economic environment. While many companies will face a downturn in sales and profits, companies that utilize open-book management could have an advantage:

If you're an "open book" company, the good news is that you at least have a leg up. The reality is that there are no magic bullets. Fighting through this tough stretch will take determination, resourcefulness, caring, creativity, and more. And employees who know exactly what is going on and where things stand will be in a position to join that fight in a proactive way. At best, employees who are left in the dark will be passive baggage. At worst, uninformed employees will make incorrect assumptions about the condition of the company, perhaps abandoning ship when it isn't really going down, or conversely, going about their work in "business as usual" fashion when it will actually take more than that to see the business through the storm.

If you're a true open book company, then your employees already understand the metrics by which the company's condition and results are measured, and they know the drivers that affect those metrics. They are already well along the road to understanding what they can do and must do in order to see the company through.

The article notes that leaders must find the right balance between employee involvement and taking responsibility for making tough decisions. It suggests some key principles:

• Don't sugar-coat it.
  
• Don't blame everything on the economy.
  
• Maintain a positive attitude.

It also expands on how, regardless of the actual performance of the company, valuation multiples will be dropping to reflect the declining multiples paid in general:

Much has been written about the process of valuing a privately held business. It is worth appreciating, however, the larger truth: that the market value of any asset (whether a car or a house or a business) is determined by the process of supply and demand. Professional business appraisers ply their trade by attempting to understand and predict how that process will operate. In the current economic climate when it comes to the marketplace in which businesses are bought and sold, overall demand has weakened significantly while the supply of businesses made available for sale is increasing. Economists will tell us, therefore, that the intersection of supply and demand will now be at a lower price point than would previously have been the case. The upshot? Even if your business is continuing to perform as well as it did a year ago, when your appraiser comes to you next spring with your updated valuation, don't be surprised if you are told that your company is worth less than it was a year ago.