By Tom Fulton, CPA, Cowan, Gunteski & Co., P.A., Litigation & Valuation Services Group, 732.676.4117, tfulton@cgteam.com
We are almost a year into the coronavirus pandemic, and have heard and seen the impact upon the country, the state, and the community. On a national level the US economy contracted 3.5% on an annual basis in 2020, the largest contraction for any full year since the demobilization from World War II in 1946. However, there was a precipitous contraction in the second quarter followed by a partial rebound in the second half of 2020. According to statistics by the International Monetary Fund1, the proportion of people out of work in the US hit an end of year total of 8.9% although it was in double digits during the year.
Yelp’s Local Economic Impact Report (September 2020)2 provides the Covid-19 pandemic hit restaurants and retail businesses the worst. We all have had some experience with this. Nationally, as of August 31, 2020 the restaurant industry witnessed 32,109 closures with 19,590 of those closures likely to be permanent. Breakfast/brunch restaurants, burger joints, and Mexican restaurants were among the types that reported the highest business closures. Additionally, the pandemic has affected gift shops, men’s clothing, and women’s clothing boutiques the second hardest after the restaurant industry.
When a new client calls, and he or she is the owner (or the spouse of an owner) in one of these hard hit small business sectors, should you instantly assume it’s all doom and gloom? The statistics, the news, and other media sources seem to indicate it is. However, this is when you and your forensic accountant need to understand the facts and circumstances of that business, its operations, and the capital and monthly cash flow requirements. This can be even more critical if you are representing the non-business owning spouse.
Some restaurants have maintained their cash flow with take-out services and those that can adapt have survived and even flourished. Living in a New Jersey beach town all my life, I have seen different businesses handle this crisis in their own way. Some popular summer bars and restaurants chose to close, even all summer. Some stayed open and put up tents in their parking lot and effectively brought the restaurant and social scene outside.
As many are aware, if you live at the Jersey Shore, the beach towns have an annual influx of recently graduated twenty-something year-olds, and in some areas this year was no exception. These twenty-something year-olds stayed the whole summer, worked remotely, often didn’t go back to their parent’s home during the week, and went out to eat, drink, and socialize every day during the summer rental season. Many of the bar/pubs and restaurants that had an outdoor space had a great year. Additionally, many people had more disposable money because they didn’t have commuting costs and other costs associated with the pandemic. Is your new client in one of these situations or the spouse of your client? A site visit and an in-depth knowledge of what actions were taken during the crisis to gain specific knowledge is more important than ever.
Like many large retailers, small retailers mostly struggled in 2020, but some business sectors were minimally affected by the coronavirus pandemic. Firms of lawyers, accountants, architects, and other professionals may not have had the dramatic negative financial impact. Accounting firms may have picked up a lot of new business with the PPP loan process including the initial applications and the subsequent applications for debt forgiveness. Your client may have had a significant increase or decrease in cash flow.
Auto related businesses and the construction trades both had under 10 out of 1,000 businesses close up for the six month period ended August 31, 2020. Professionals (lawyers, architects, and accountants) had an estimated 2.0 closings per 1,000 businesses. That’s not bad. By contrast restaurant and small retailers had as high as 55 out of 1,000 closures nationally. Keep in mind these statistics were only through August. A December 2020 poll by the “New Jersey Restaurant & Hospitality Association”3 found that more than a third of restaurants polled felt they may close in the next six months.
Conversely, real estate professionals at the Jersey Shore have been very busy. By way of example, in Monmouth County, New Jersey new home sale closings were up 13.3% in 2020 over 2019. While simultaneously, the closing time decreased by 13.1% and the median price increased 17.1%. People were moving out of New York city and North Jersey and were looking for homes with space and yards in some areas and willing to sink some money in them. Other counties experienced similar statistics including Morris, Ocean, and Somerset. Some counties were negatively impacted. If you have a client or the spouse of a client who owns a real estate agency, law office, title search company, or is in one of the construction trades, you need to know the unique circumstances of the area that they are located. And certainly, your retained expert better know the uniqueness.
Understanding the specifics of your client’s or the spouse of your client’s business has always been important. Much of the impact from the coronavirus pandemic may have led to a significant change in your client’s ability to meet alimony and child support obligations as well as in the value of their businesses. That said, there have been unique opportunities for success and prosperity and your client may have encountered one of those opportunity areas. Just don’t assume everything and everybody’s business was negatively impacted. As always, It’s a case by case basis and fact sensitive.
1. Jones, L., Palumbo, D., & Brown, D. (2021, January 24). Coronavirus: How the pandemic has changed the world economy. BBC News. https://www.bbc.com/news/business-51706225
2. Bialik, C., & Gole, D. (2020, September). Yelp: Local Economic Impact Report. Yelp Economic Average. https://www.yelpeconomicaverage.com/business-closures-update-sep-2020
3. Nearly 40% of New Jersey Restaurants May Close Within 6 Months: Poll. (2020, December 9). NBC New York. https://www.nbcnewyork.com/on-air/as-seen-on/nearly-40-of-new-jersey-restaurants-may-close-within-6-months-poll/2769293/
