With Deloitte Private’s exclusive focus on serving private clients of all sizes, Mark Davis, Audit & Assurance partner and national managing partner of Deloitte Private Enterprises for Deloitte & Touche LLP, has a keen understanding of how private businesses can leverage opportunities and address complex challenges. Read this Q&A, where Mark shares his perspectives on the ways the private sector can continue to thrive throughout 2019.
What are some ways private companies can continue to thrive and accelerate growth in the current environment?
Mark Davis: Private companies benefit from staying a few steps ahead to support a sustainable business strategy. Political uncertainty and market fluctuations are typically the unknown factors at play when a company is planning for its future. To properly safeguard its position, a company can, and needs to, assess its vulnerabilities as a business and shore up any risks to the best of its ability. For example, the ongoing viability of the business can be drastically affected should loan agreements expire and the terms change. Thus, companies can benefit from pursuing loan extensions now, rather than risk the chance that loan renegotiations would be taking place during a recessionary period.
While 2019 could be a banner year for IPOs, going public is not the only exit strategy for private companies. Can you share your thoughts on the options private companies could consider when it comes to exit strategies?
Mark Davis: Private companies have options when it comes to exit planning. No longer is going public the only or best choice. Cash is readily available, and venture capital firms and private equity investors are eager to deploy it. The private equity market is anxious to purchase a company or issue a convertible debt offering. By accepting investment funding but staying private, a business can retain more control—an especially important objective for many family-owned businesses. These options are important at a time when it takes much longer to go public than it did perhaps five to 10 years ago.
Private companies will soon be required to implement new accounting standards. What impacts are these standards likely to have?
Mark Davis: The two standards that are expected to be most impactful in the next two years are the Financial Accounting Standard Board’s (FASB’s) Accounting Standard Codification (ASC) 606 Revenue from Contracts with Customers and ASC 842, Leases.
For private companies affected by the new revenue recognition standard, the time to comply is now. The rule is effective for annual reporting periods beginning after December 15, 2018, and interim periods within annual reporting periods beginning after December 15, 2019. The new standard greatly enhances the related quantitative and qualitative disclosure requirements. It also introduces concepts that didn’t exist under the previous revenue recognition model—including many that involve significant judgment, such as estimating transaction price. Assembling internal resources to carry out the new standard and engaging help, as needed, to supplement these efforts are critical steps.
Ultimately the new lease accounting standard (effective for annual periods beginning after December 15, 2019, or calendar year 2020) will affect multiple aspects of a business, influencing judgment calls, data management, technology systems, and internal controls—to name a few. Because it is such a complex change, private company executives need to first understand what constitutes a lease, then appropriately identify which contracts are leases, or contain leases, and implement the necessary changes to their accounting systems.
Based on the experiences of public companies, implementation of each standard can be a complex undertaking that should not be taken lightly. Private companies should start implementation as soon as possible, if they haven’t already done so.
Are there any other areas private companies should focus on to maintain their position this year?
Mark Davis: Governance is a key area of opportunity for private companies, but one that many are not focused on. Leading private companies, especially family-owned enterprises, recognize that seizing opportunities and meeting challenges take more than entrepreneurial drive, intuition, and even business experience. They recognize that a governance strategy is critical to business success. For family businesses, a family strategy that considers a host of factors including family goals, careers, communication, and roles and responsibilities is a necessary first step. An essential companion to the strategy, a family governance structure, provides a framework and guidelines to advance value creation and family harmony while reducing conflict and business interruption.
Alignment of strategy and governance with family members’ goals and wishes can help the business navigate the complexities of balancing personal and business needs. As private companies consider strategies to help position themselves for success, taking a structured, business-first approach can support wealth creation, career satisfaction, risk reduction, and, for family businesses, family harmony.
Looking to the rest of 2019 and 2020, what excites you most about the private company space?
Mark Davis: Even against an unpredictable market, I’m confident that private companies can continue to thrive. Private companies are in a strong position due to an influx of private capital, relaxed regulations, and tax cuts. There is an appetite for growth spending with a focus on strategic acquisitions. At a higher pace than we’ve seen in years, companies are building or expanding their physical presence. Even with potential approaching headwinds, momentum should continue well into 2020.
Article originally appeared in Crain’s New York.
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