THE NEW ENVIRONMENT: ANALYZING THE IMPACT OF COVID-19 ON YOUR PEO

PROFITABILITY & GROWTH

By Frank Fontneau

Every business in America has been affected by COVID-19, but the impact has been disparate. More so than in other crises, its consequences have varied widely, whether economic, health, or social. It distressed both individuals and businesses in varying degrees. With that in mind, the direct financial impact to your PEO can be a complicated and intricate picture.

Your PEO’s financial health is correlated the most with the impact felt by your clients, and the easiest way to stratify that is to break your book of business down by industry:

• Heavy impact and long recovery. If you had a concentration in hospitality or tourism, your clients have likely struggled the most and have the longest road to recovery.
• Medium impact and quick recovery. Other industries, such as medical and dental practices and childcare, were heavily impacted by furloughing staff and temporarily closing locations, but have largely bounced back in most states.
• Low to positive impact. Essential services such as logistics and some light industrial operations experienced a major increase in demand and corresponding growth.

EVALUATE BY INDUSTRY

Looking at your year-to-date attrition based on North American Industry Classification System (NAICS) code should be your first step. Do not just look at the attrition, though; look at the client and worksite employee (WSE) counts by industry and look at them from the start of 2020 to now. How far have some industries fallen? If these industries do not improve, how much farther can they fall? Understand each of your top industries, have a plan for them, and take this into account in your forecast.

At the individual client level, you likely have already begun to talk to clients and gained an idea of their individual plans to grow or survive. Taking this and the aggregate data into account, you can rebuild your forecasted attrition and growth within your book of business. Layer on your sales plan for the year and you have the revenue driver of your 2021 budget.

The wide variance of outcomes is just one more anomaly in the new normal. At this point, COVID-19 fatigue is emerging. People are longing to return to normal. Employees are scheduling time out of the office for the holidays, clients are getting back to their core businesses and creating new budgets for 2021, bankers are looking to begin to review performance and make new loans, M&A deals are progressing, and clients still need to pay their employees and provide benefits for their welfare. The PEO business has largely survived, and in some cases thrived.

MAKE THE MOST OF TRENDS

The farther we get from March 16, the day the president announced a national emergency and put into practice “15 days to slow the spread,” the more the line that marks the time the virus entered our lives becomes blurred. Soon, a lot of the new normal will be normal and PEOs will continue to see these trends develop:

• Virtual interactions with clients are here to stay (everything from sales to implementation to open enrollment);
• Access to information and the technology that supports it will continue to be a key driver, as was seen with the need to get Payroll Protection Program (PPP) reporting out to clients; and
• Internal reporting will continue to accelerate toward real-time data for financial and operational reporting.

All three of these and other emerging trends can be a positive for your PEO. The virtual interactions allow your team to be more efficient, interface with more clients, and reduce the expense and time required to travel. Access to information can be a client win that helps with retention, but it needs to be weighed properly with the cost of technology. Improving internal reporting will allow you to make more informed and timely decisions. Take a hard look at selling, general, and administrative expenses (SG&A) budget costs than normal in this year of accelerated changes.

COMPLETING YOUR BUDGET

To complete the budget, you need to determine your staffing levels. How will the trends and changes above change your staffing needs? How many more (or fewer) people will you need to service your forecasted client levels?

After accounting for staff levels and building your budget, you should be able to project your cash flow and any key financial and liquidity ratios with better accuracy. These forward-looking figures should be more of the focus, rather than going back, to fully understand exactly what occurred in 2020 and how these ratios were impacted over that time period.

With that said, documenting what happened and the pandemic’s impact may be extremely helpful in the future, whether it is part of an eventual sale or to normalize the financials. Key items may vary widely, but here are a couple of them to consider with your financial advisor:

• During the height of the crisis, did you offer any reduced fees to assist clients or promo rates to boost sales? What is the impact of these reductions and how long will they continue? If you can easily calculate these items, including them as a “discount” cost or noting their effect by month would be helpful for future financial analysis.
• Did you incur one-time, non-recurring expenses for items as varied as office cleaning and COVID-19 employee bonuses?

When prospective buyers analyze downside risk, the 2020 period is going to be the new 2008. They are going to want to dig in to as much data as you can provide. Make sure you memorialize the items that will make you and your team look good for all the tireless work you performed.

2020 is the year we never want to repeat. While we cannot change what happened, we can look forward to 2021, reorient our businesses, learn from our situations, and embrace the changes that benefit our industry the most.

FRANK FONTNEAU
RVR Partner
RVR Consulting Group
Winter Park, Florida