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User Acceptance Testing: A plan for successful software implementation

05.20.20

Read this if you are planning for, or are in the process of implementing a new software solution.

User Acceptance Testing (UAT) is more than just another step in the implementation of a software solution. It can verify system functionality, increase the opportunity for a successful project, and create additional training opportunities for your team to adapt to the new software quickly. Independent verification through a structured user acceptance plan is essential for a smooth transition from a development environment to a production environment. 

Verification of functionality

The primary purpose of UAT is to verify that a system is ready to go live. Much of UAT is like performing a pre-flight checklist on an aircraft. Wings... check, engines... check, tires... check. A structured approach to UAT can verify that everything is working prior to rolling out a new software system for everyone to use. 

To hold vendors accountable for their contractual obligations, we recommend an agency test each functional and technical requirement identified in the statement of work portion of their contract. 

It is also recommended that the agency verify the functional and technical requirements that the vendor replied positivity to in the RFP for the system you are implementing. 

Easing the transition to a new software

Operational change management (OCM) is a term that describes a methodology for making the switch to a new software solution. Think of implementing a new software solution like learning a new language. For some employees, the legacy software solution is the only way they know how to do their job. Like learning a new language, changing the way business and learning a new software can be a challenging and scary task. The benefits outweigh the anxiety associated with learning a new language. You can communicate with a broader group of people, and maybe even travel the world! This is also true for learning a new software solution; there are new and exciting ways to perform your job.

Throughout all organizations there will be some employees resistant to change. Getting those employees involved in UAT can help. By involving them in testing the new system and providing feedback prior to implementation, they will feel ownership and be less likely to resist the change. In our experience, some of the most resistant employees, once involved in the process, become the biggest champions of the new system.  

Training and testing for better results

On top of the OCM and verification benefits a structured UAT can accomplish, UAT can be a great training opportunity. An agency needs to be able to perform actions of the tested functionality. For example, if an agency is testing a software’s ability to import a document, then a tester needs to be trained on how to do that task. By performing this task, the tester learns how to login to the software, navigate the software, and perform tasks that the end user will be accomplishing in their daily use of the new software. 

Effective UAT and change management

We have observed agencies that have installed software that was either not fully configured or the final product was not what was expected when the project started. The only way to know that software works how you want is to test it using business-driven scenarios. BerryDunn has developed a UAT process, customizable to each client, which includes a UAT tracking tool. This process and related tool helps to ensure that we inspect each item and develop steps to resolve issues when the software doesn’t function as expected. 

We also incorporate change management into all aspects of a project and find that the UAT process is the optimal time to do so. Following established and proven approaches for change management during UAT is another opportunity to optimize implementation of a new software solution. 

By building a structured approach to UAT, you can enjoy additional benefits, as additional training and OCM benefits can make the difference between forming a positive or a negative reaction to the new software. By conducting a structured and thorough UAT, you can help your users gain confidence in the process, and increase adoption of the new software. 

Please contact the team if you have specific questions relating to your specific needs, or to see how we can help your agency validate the new system’s functionality and reduce resistance to the software. We’re here to help.   
 

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Read this if your organization receives charitable donations.

As the holiday season has passed and tax season is now upon us, we have our own list of considerations that we would like to share—so that you don’t end up on the IRS’ naughty list!

Donor acknowledgment letters

It is important for organizations receiving gifts to consider the following guidelines, as doing some work now may save you time (and maybe a fine or two) later.

Charitable (i.e., 501(c)(3)) organizations are required to provide a contemporaneous (i.e., timely) donor acknowledgment letter to all donors who contribute $250 or more to the organization, whether it be cash or non-cash items (e.g., publicly traded securities, real estate, artwork, vehicles, etc.) received. The letter should include the following:

  • Name of the organization
  • Amount of cash contribution
  • Description of non-cash items (but not the value)
  • Statement that no goods and services were provided (assuming this is the case)
  • Description and good faith estimate of the value of goods and services provided by the organization in return for the contribution

Additionally, when a donor makes a payment greater than $75 to a charitable organization partly as a contribution and partly as a payment for goods and services, a disclosure statement is required to notify the donor of the value of the goods and services received in order for the donor to determine the charitable contribution component of their payment.

If a charitable organization receives noncash donations, it may be asked to sign Form 8283. This form is required to be filed by the donor and included with their personal income tax return. If a donor contributes noncash property (excluding publicly traded securities) valued at over $5,000, the organization will need to sign Form 8283, Section B, Part IV acknowledging receipt of the noncash item(s) received.

For noncash items such as cars, boats, and even airplanes that are donated there is a separate Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes, which the donee organization must file. A copy of the Form 1098-C is provided to the donor and acts as acknowledgment of the gift. For more information, you can read our article on donor acknowledgments.

Gifts to employees

At the same time, many employers find themselves in a giving spirit, wishing to reward the employees for another year of hard work. While this generosity is well-intended, gifts to employees can be fraught with potential tax consequences organizations should be aware of. Here’s what you need to know about the rules on employee gifts.

First and foremost, the IRS is very clear that cash and cash equivalents (specifically gift cards) are always included as taxable income when provided by the employer, regardless of amount, with no exceptions. This means that if you plan to give your employees cash or a gift card this year, the value must be included in the employees’ wages and is subject to all payroll taxes.

There are, however, a few ways to make nontaxable gifts to employees. IRS Publication 15 offers a variety of examples of de minimis (minimal) benefits, defined as any property or service you provide to an employee that has a minimal value, making the accounting for it unreasonable and administratively impracticable. Examples include holiday or birthday gifts, like flowers, or a fruit basket, or occasional tickets for theater or sporting events.

Additionally, holiday gifts can also be nontaxable if they are in the form of a gift coupon and if given for a specific item (with no redeemable cash value). A common example would be issuing a coupon to your employee for a free ham or turkey redeemable at the local grocery store. For more information, please see our article on employee gifts.

Other year-end filing requirements

As the end of the calendar year approaches, it is also important to start thinking about Form 1099 filing requirements. There are various 1099 forms; 1099-INT to report interest income, 1099-DIV to report dividend income, 1099-NEC to report nonemployee compensation, and 1099-MISC to report other miscellaneous income, to name a few.

Form 1099-NEC reports non-employment income which is not included on a W-2. Organizations must issue 1099-NECs to payees (there are some exclusions) who receive at least $600 in non-employment income during the calendar year. A non-employee may be an independent contractor, or a person hired on a contract basis to complete work, such as a graphic designer. Payments to attorneys or CPAs for services rendered that exceed $600 for the tax year must be reported on a Form 1099-NEC. However, a 1099-MISC would be sent to an Attorney for payments of settlements. For additional questions on which 1099 form to use please contact your tax advisor.

While federal income tax is not always required to be withheld, there are some instances when it is. If a payee does not furnish their Tax Identification Number (TIN) to the organization, then the organization is required to withhold taxes on payments reported in box 1 of Form 1099-NEC. There are other instances, and the rates can differ so if you have questions, please reach out to your tax advisor. 1099 forms are due to the recipient and the IRS by January 31st.

Whether organizations are receiving gifts, giving employee gifts, or thinking about acknowledgments and other reporting we hope that by making our list and checking it twice we can save you some time to spend with your loved ones this holiday season. We wish you all a very happy and healthy holiday season!

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Making a year-end list and checking it twice

Read this if your company is considering financing through a sale leaseback.

In today’s economic climate, some companies are looking for financing alternatives to traditional senior or mezzanine debt with financial institutions. As such, more companies are considering entering into sale leaseback arrangements. Depending on your company’s situation and goals, a sale leaseback may be a good option. Before you decide, here are some advantages and disadvantages that you should consider.

What is a sale leaseback?

A sale leaseback is when a company sells an asset and simultaneously enters into a lease contract with the buyer for the same asset. This transaction can be used as a method of financing, as the company is able to retrieve cash from the sale of the asset while still being able to use the asset through the lease term. Sale leaseback arrangements can be a viable alternative to traditional financing for a company that owns significant “hard assets” and has a need for liquidity with limited borrowing capacity from traditional financial institutions, or when the company is looking to supplement its financing mix.

Below are notable advantages, disadvantages, and other considerations for companies to consider when contemplating a sale leaseback transaction:

Advantages of using a sale leaseback

Sale leasebacks may be able to help your company: 

  • Increase working capital to deploy at a greater rate of return, if opportunities exist
  • Maintain control of the asset during the lease term
  • Avoid restrictive covenants associated with traditional financing
  • Capitalize on market conditions, if the fair value of an asset has increased dramatically
  • Reduce financing fees
  • Receive sale proceeds equal to or greater than the fair value of the asset, which generally is contingent on the company’s ability to fund future lease commitments

Disadvantages of using a sale leaseback

On the other hand, a sale leaseback may:

  • Create a current tax obligation for capital gains; however, the company will be able to deduct future lease payments.
  • Cause loss of right to receive any future appreciation in the fair value of the asset
  • Cause a lack of control of the asset at the end of the lease term
  • Require long-term financial commitments with fixed payments
  • Create loss of operational flexibility (e.g., ability to move from a leased facility in the future)
  • Create a lost opportunity to diversify risk by owning the asset

Other considerations in assessing if a sale leaseback is right for you

Here are some questions you should ask before deciding if a sale leaseback is the right course of action for your company: 

  • What are the length and terms of the lease?
  • Are the owners considering a sale of the company in the near future?
  • Is the asset core to the company’s operations?
  • Is entering into the transaction fulfilling your fiduciary duty to shareholders and investors?
  • What is the volatility in the fair value of the asset?
  • Does the transaction create any other tax opportunities, obligations, or exposures?

The Financial Accounting Standards Board’s new standard on leases, Accounting Standards Codification (ASC) Topic 842, is now effective for both public and private companies. Accounting for sale leaseback transactions under ASC Topic 842 can be very complex with varying outcomes depending on the structure of the transaction. It is important to determine if a sale has occurred, based on guidance provided by ASC Topic 842, as it will determine the initial and subsequent accounting treatment.

The structure of a sale leaseback transactions can also significantly impact a company’s tax position and tax attributes. If you’re contemplating a sale leaseback transaction, reach out to our team of experts to discuss whether this is the right path for you.

Article
Is a sale leaseback transaction right for you?

Read this if you are in the senior living industry.

Happy New Year! While it may be a new calendar year, the uncertainties facing senior living facilities are still the same, and the question remains: When will the Public Health Emergency end, and how will it impact operations? Federal and state relief programs ended in 2022, and facilities are trying to find ways to fund operations as they face low occupancy levels. Inflation was at 7.1% in November and staffing remains a significant challenge. So, what can the industry expect for 2023?

Occupancy

Through the pandemic, occupancy losses were greater in nursing facilities than in assisted living (AL) and independent living (IL) facilities. This trend of care shifting away from nursing facilities had started before the onset of the pandemic. From 2018-2020, nursing facility volume decreased by over 5% while AL facilities occupancy increased by 1.1%.

Nursing facility occupancy nationwide was 80.2% in January of 2020 and declined to as low as 67.5% in January 2021. In 2022, nursing facility occupancy began to recover. As of December 18, 2022, nationwide occupancy had rebounded to 75.8%.

The assisted living and independent living markets were certainly impacted by the pandemic but not to the extent of the nursing facilities. AL and IL occupancy was reported at 80.9% in March 2021, a record low occupancy for the industry. Through the third quarter of 2022, NIC reported IL occupancy at 84.7%, which was up from 83.8% in the second quarter of 2022. AL occupancy was at 79.7%. in the third quarter of 2022. 

Providers are starting to see some positive signs with occupancy, but are reporting the recovery has been slowed by staffing shortages.

Cost of capital

The lending market is tightening for senior living providers and occupancy issues are negatively impacting facilities bottom lines. In addition, there has been significant consolidation in the banking industry. As a result, interest and related financing costs have risen. For those facilities that aren’t able to sustain their bottom lines and are failing financial covenants, lenders are being less lenient on waivers and in some cases, lenders are imposing default lending rates. 

Ziegler reports in their Winter 2022 report the lending market for senior housing is beginning to pick up. The majority of the lenders surveyed were regional banks, and reported they are offering both fixed and floating rate loans. Lenders are also reporting an increased scrutiny on labor costs coupled with looking at a facility’s ability to increase occupancy. 

Despite these challenges, analysts are still optimistic for 2023 as inflation seems to be tapering, which will hopefully lead to a stabilization of interest rates.

Staffing

Changes to five-star rating
In July 2022, the Centers for Medicare and Medicaid Services (CMS) modified the five-star rating to include Registered Nurse (RN) and administrator turnover. The new staffing rating adds new measures, including total nurse staffing hours per resident day on the weekends, the percentage of turnover for total nursing staff and RNs, and the number of administrators who have left the nursing home over a 12-month period.

Short-term this could have a negative impact on facilities ratings as they are still struggling to recruit and retain nursing staff. The American Healthcare Association has performed an analysis, and on a nationwide basis these changes resulted in the number of one-star staffed facilities rising from 17.71% to 30.89%, and the percentage of one-star overall facilities increasing from 17.70% to 22.08%.

Staffing shortages 
Much like the occupancy trend, nursing facilities faced staffing issues even before the pandemic. From 2018 to 2020, the average number of full-time employees dropped at a higher rate, 37.1%, than admissions, 15.7%. Data from the Bureau of Labor and Statistics and CMS Payroll Based Journal reporting shows nursing facilities lost 14.5% of their employees from 2019-2021 and assisted living facilities lost 7.7% over the same time period. This unprecedented loss of employment across the industry is leading to burnout and will contribute to future turnover.

This loss of full-time employees has created a ripple effect across the healthcare sector. Nursing facilities are unable to fully staff beds and have had to decline new admissions. This is causing strain on hospital systems as they are unable to place patients in post-acute facilities, creating a back log in hospitals and driving up the cost of care.

While the industry continues to experience challenges recruiting and retaining employees, the labor market is starting to swing in the favor of providers. Some healthcare sectors have recovered to pre-pandemic staffing levels. Providers are also starting to report lower utilization of contract labor.

While the industry continues to experience challenges recruiting and retaining employees, the labor market is starting to swing in the favor of providers. 

Minimum staffing requirement
CMS is expected to propose a new minimum staffing rule by early spring 2023. Federal law currently requires Medicare and Medicaid certified nursing homes provide 24-hour licensed nursing services, which are “sufficient to meet nursing needs of their residents”. CMS issued a request for information (RFI) as part of the Fiscal Year 2023 Skilled Nursing Facility Prospective Payment System Proposed Rule. CMS received over 3,000 comments with differing points of view but prevailing themes from patient advocacy groups regarded care of residents, factors impacting facilities' ability to recruit and retain staff, differing Medicaid reimbursement models, and the cost of implementing a minimum staffing requirement. In addition to the RFI, CMS launched a study that includes analysis of historical data and site visits to 75 nursing homes. 

In a study conducted by the American Healthcare Association, it is estimated an additional 58,000 to 191,000 FTEs will be needed (at a cost of approximately $11.3 billion) to meet the previously recommended 4.1 hours per patient day minimum staffing requirements.

One potential consequence of the minimum staffing requirement is higher utilization of agency staffing. Nursing facilities saw a 14.5% decrease in staffing through the pandemic and are still struggling to recruit and retain full-time staff. To meet the minimum staffing requirements, providers may need to fill open positions with temporary staffing. 

Provider Relief Funds (PRF) 

Don’t forget if you received PRF funds in excess of $10,000 between July 1 and December 31, 2021, Phase 4 reporting period opened January 1, 2023, and will close March 31, 2023.
Many of the changes to the industry brought on by the pandemic are likely to remain. Facilities who are putting a focus on their staff and working to create a positive work environment are likely to keep employees for longer.

While there are many challenges in the current environment, they were made to be met, and we are here to help. If you have any questions or would like to talk about your specific needs, please contact our senior living team. Wishing you a successful 2023.
 

Article
Status of the senior living industry: The good, the bad, and the uncertain

Read this if you are subject to SOC examinations.

In late October 2022, the American Institute of Certified Public Accountants’ (AICPA’s) Assurance Services Executive Committee (ASEC) released an update to the System and Organization Control (SOC) 2 reporting guide. Significant updates have been made to the Description Criteria implementation guidance and the Trust Services Criteria points of focus. Overall, the changes provide clarity around several recent and emerging industry topics and continue to promote reporting quality and consistency.

Summary of changes

Available for use now, the AICPA updates for SOC 2 examinations are significant and may require additional time and attention from companies who currently have a SOC 2 report or are planning on working toward compliance. High-level updates include incorporating new attestation standards (e.g., SSAE-20 and SSAE-21):

  • Updates to the Description Criteria implementation guidance for additional clarity regarding certain disclosure requirements, guidance on disclosure of how controls meet the requirements of a process or control framework, and guidance on disclosure of information about the risk assessment process and specific risks
  • Updates to the points of focus that support the application of the Trust Services Criteria that better reflect the ever-changing technology, legal, regulatory, and cultural risks, data management requirements, particularly related to confidentiality, and differentiating between a data controller and a data processor for privacy engagements
  • Incorporating, where appropriate, updates included in the AICPA Guide Reporting on Controls at a Service Organization Relevant to User Entities’ Internal Control over Financial Reporting (SOC 1 guide)
  • Incorporating, where applicable, additional guidance included in the AICPA Guide Reporting on an Examination of Controls Relevant to Security, Availability, Processing Integrity, Confidentiality, or Privacy in a Production, Manufacturing, or Distribution System (SOC for supply chain guide), particularly related to the risk assessment guidance

Additional updates

Other updates from the AICPA include, but are not limited to, the following:

  • Making qualitative materiality assessments (from the AICPA whitepaper on materiality)
  • Considering the service organization’s use of software applications and tools (from the SOC Tools FAQ)
  • Considering the operation of periodic controls that operated prior to the period covered by the examination
  • Considering management’s use of specialists
  • Performing and reporting in a SOC 2+ engagement (including an updated illustrative service auditor’s report)
  • Addressing considerations when the service organization has identified a service commitment or system requirement related to meeting the requirements of a process or control framework (such as HIPAA, ISO, or NIST)
  • Supplements and several appendices were removed and will be replaced with links to the appropriate documents on the AICPA website

If you currently have or will be working toward a SOC 2 report, it’s essential to understand the impact to the SOC 2 reporting process. Early preparation will help your organization stay ahead of the curve when it comes to achieving compliance. It is also essential to help ensure that frameworks are aligned and controls are in place to effectively guard against cybersecurity risks and protect sensitive data. If you have questions about SOC audits, or your specific situation, please contact our SOC Audits team. We’re here to help.

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Navigating changes to the SOC 2 guide

Read this if you are interested in well-being. This will be the first of two articles. This first article will focus on awareness. 

When the United States Surgeon General, Dr. Vivek Murthy, recently announced five priority areas of focus that represented “the most pressing public health issues of our time,” workplace well-being was one of the areas identified. According to the Current Priorities of the US Surgeon General website, the priority on workplace well-being aims to address the “numerous and cascading impacts for the health of individual workers and their families, organizational productivity, the bottom-line for businesses, and the US economy.” 

US Surgeon General current priorities:

  1. Workplace well-being
  2. Address the impacts of COVID-19
  3. Health misinformation
  4. Health worker burnout
  5. Youth mental health

Worker stress a growing challenge to employee well-being in many areas

The Surgeon General’s workplace well-being framework discusses many dimensions of well-being, with a focus on mental health. Research cited in the report suggests that worker stress levels grew from 2020 to 2021. In a different 2021 survey of 1,500 US adult workers across for profit, not-for-profit, and government sectors, 84% of respondents reported at least one workplace factor (e.g., emotionally draining work, challenges with work-life balance, or lack of recognition) that had a negative impact on their mental health. In most cases, the workplace factors contributing to stress can be managed or mitigated by integrating well-being into organizational planning and workforce development. 

Another study conducted by Mental Health America surveyed 11,000 workers across 17 industries in the US in 2021. It found that 80% of respondents felt that their workplace stress negatively affected their relationships with friends, family, and coworkers. The study also found that only 38% of those who know about their organization’s mental health services would feel comfortable using them. Statistics like this underscore the need for more deliberate efforts on the part of employers to provide services that support employees’ well-being. 

Well-being and human needs

At the core of the Surgeon General’s framework are five essentials of well-being and their associated “human need” components, all of which center around worker voice and equity. 

Well-being essential Human need
Protection from harm Safety
Security
Connection and community Social support
Belonging
Work-life harmony Autonomy
Flexibility
Mattering at work Dignity
Meaning
Opportunity for growth Learning
Accomplishment

As Dr. Murthy wrote in the introduction to the report, “We have the power to make workplaces engines for mental health and well-being. Doing so will require organizations to rethink how they protect workers from harm, foster a sense of connection among workers, show them that they matter, make space for their lives outside work, and support their long term professional growth.”

Parallels with BerryDunn’s well-being consulting approach

BerryDunn’s well-being approach aligns with the framework suggested by the Surgeon General. Today’s most effective well-being programs are multi-dimensional and emphasize a culture-first approach. In our experience, the most successful well-being programs are those that emphasize well-being as both a personal responsibility and a shared value that is promoted through policies, benefits, and cultural norms. 

For more information on how your organization can create and deliver a program that supports employees in the various aspects of well-being, or if you have other questions specific to your organization, please contact our Well-being consulting team. We’re here to help.

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Surgeon General identifies workplace well-being as a 2023 priority

In a closely held business, ownership always means far more than business value. Valuing your business will put a dollar figure on your business (and with any luck, it might even be accurate!). However, ownership of a business is about much more than the “number.” To many of our clients, ownership is about identity, personal fulfillment, developing a legacy, funding their lifestyle, and much more. What does business ownership mean to you? In our final article in this series, we are going to look at questions around what ownership means to different people, explore how to increase business value and liquidity, and discuss the decision of whether to grow your business or exit—and which liquidity options are available for each path. 

While it may seem counterintuitive, we find that it is best to delay the decision to grow or exit until the very end of the value acceleration process. After identifying and implementing business improvement and de-risking projects in the Discover stage and the Prepare stage (see below), people may find themselves more open to the idea of keeping their business and using that business to build liquidity while they explore other options. 

Once people have completed the Discover and Prepare stages and are ready to decide whether to exit or grow their business, we frame the conversation around personal and business readiness. Many personal readiness factors relate to what ownership means to each client. In this process, clients ask themselves the following questions:

  • Am I ready to not be in charge?
  • Am I ready to not be identified as the business?
  • Do I have a plan for what comes next?
  • Do I have the resources to fund what’s next? 
  • Have I communicated my plan?

On the business end, readiness topics include the following:

  • Is the team in place to carry on without me?
  • Do all employees know their role?
  • Does the team know the strategic plan?
  • Have we minimized risk? 
  • Have I communicated my plan?

Whether you choose to grow your business or exit it, you have various liquidity options to choose from. Liquidity options if you keep your business include 401(k) profit sharing, distributions, bonuses, and dividend recapitalization. Alternatively, liquidity options if you choose to exit your business include selling to strategic buyers, ESOPs, private equity firms, management, or family. 

When it comes to liquidity, there are several other topics clients are curious about. One of these topics is the use of earn-outs in the sale of a business. In an earn-out, a portion of the price of the business is suspended, contingent on business performance. The “short and sweet” on this topic is that we typically find them to be most effective over a two- to three-year time period. When selecting a metric to base the earn-out on (such as revenue, profit, or customer retention), consider what is in your control. Will the new owner change the capital structure or cost structure in a way that reduces income? Further, if the planned liquidity event involves merging your company into another company, specify how costs will be allocated for earn-out purposes. 

Rollover equity (receiving equity in the acquiring company as part of the deal structure) and the use of warrants/synthetic equity (incentives tied to increases in stock price) is another area in which we receive many questions from clients. Some key considerations:

  • Make sure you know how you will turn your rollover equity into cash.
  • Understand potential dilution of your rollover equity if the acquiring company continues to acquire other targets. 
  • Make sure the percentage of equity relative to total deal consideration is reasonable.
  • Seller financing typically has lower interest rates and favorable terms, so warrants are often attached to compensate the seller. 
  • Warrants are subject to capital gains tax while synthetic equity is typically ordinary income. As a result, warrants often have lower tax consequences.
  • Synthetic equity may work well for long-term incentive plans and for management buyouts. 

We have found that through the value acceleration process, clients are able to increase business value and liquidity, giving them control over how they spend their time and resources.

If you are interested in learning more about value acceleration, please contact the business valuation services team. We would be happy to meet with you, answer any questions you may have, and provide you with information on upcoming value acceleration presentations. 

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Decide: Value acceleration series part five (of five)

Read this if you are a part of the gaming industry.

The gaming industry has bounced back during 2021 and 2022 following pandemic-related declines, but a potential economic downturn will likely impact consumer behavior and have effects for gaming businesses. Though recessionary concerns may prompt some consumers to rein in spending, several factors point to resilience in the gaming industry, including customer retention initiatives, the growth of digital gaming and sports betting, and the continued allure of experiences offered by casino resorts.

Instead of merely weathering a potential recession, gaming companies can position for sustained success by reviewing strategic plans and focusing on key business objectives. Financial discipline will be another priority, particularly if changes in consumer spending affect revenue growth during 2023.

Retention has a big payoff in a recessionary environment

Despite the rate of inflation in the US reaching levels not seen in more than 40 years during 2022, consumer spending has remained relatively strong. According to data from the Bureau of Economic Analysis (BEA), disposable personal income and personal consumption expenditures both increased slightly more than expected during September. Interest rates have continued to rise, however, and there are indications that some consumers are delaying the purchase of big-ticket items, which suggests a slowdown in some areas of spending.

To help mitigate the effects of a potential recession, gaming companies may consider shifting more attention to customer retention in addition to customer acquisition. That strategy could be especially important for sports betting, a subsector that has invested heavily in customer acquisition in recent years—and may not be as recession-proof as some had predicted. According to a TransUnion study, 54% of US sports bettors earn at least $100,000 per year, but even high-income earners show signs of cutting back on discretionary spending like gambling. Nevertheless, many sportsbooks have seen relatively low rates of customer churn this year despite inflation, which could be due partly to the growth in popularity of unique multi-leg wagers such as same-game parlays.

High costs for customer acquisition due to digital competition can pose challenges for companies trying to grow their consumer base, and recessionary pressures make it even more important to keep existing customers engaged. Fragmentation and evolving competition also complicate predictions for the lifetime value of a new customer. The longer a customer stays, however, the bigger the return on initial acquisition costs.

Retention strategies

Strategies that focus on retention can help reduce churn amid growing recessionary pressures. These strategies vary for different types of companies, such as online gambling (iGaming), land-based casinos, or a hybrid of online and on-premises gaming. Taking steps to improve customer experience and leverage data analytics can both help increase engagement. Such initiatives can include customized loyalty and reward programs based on a customer’s unique habits, as well as data insights about the most popular types of games and bets that enable cross-promotion. Reload bonuses, referral bonuses, free bets, and percentage back on losses are examples of other strategies to help keep existing players engaged. Critically, even small improvements in retention can have a significant impact on margins and profitability.

Growth potential remains, but a downturn would impact industry subsectors differently

If recessionary pressures prove to be a drag on consumer spending in the months ahead, it may affect some gaming sectors differently than others. Even if consumers reduce discretionary spending, casino resorts could still fare well because of their diversified offerings, but they also have much higher operating costs than dedicated iGaming companies. Land-based casinos in particular should practice financial discipline and manage labor costs. They can achieve this by maintaining balanced staffing levels, expanding electronic casino games, and adopting cashless gaming and digital payments.

Overall, casino resorts can provide a relatively affordable range of unique leisure experiences. People remain eager to travel after dealing with pandemic-related restrictions, and recent TSA checkpoint data indicates airport activity has been near or above 2019 levels. BEA data also indicates that consumer spending on services, such as travel and dining, has outpaced spending on goods in recent months.

Although research has shown flat levels of growth for casino gambling during previous recessions, the industry has seen several notable changes in recent years. Digital gaming remains a convenient option for consumers and has experienced a spike in adoption in recent years, which aids both digital-only operators and land-based casinos that offer a digital component. Casino resorts can also use data-backed insights to help convert their online customers into on-premises customers through targeted offers and other marketing initiatives.

Sports betting has also grown rapidly during the past five years, which provides an accessible platform for a much larger population of customers than previously. Before the US Supreme Court’s 2018 decision in Murphy v. National Collegiate Athletic Association, only a few states could claim partial exemption to the 1992 federal ban on sports betting. As of November 2022, more than 30 states and the District of Columbia allow sports betting, and additional states are considering similar legislation.

Recession-related shifts in discretionary spending may not impact gaming as much as other consumer sectors. A May 2022 YouGov poll of 16 countries shows that while monthly gamblers may cut back on betting, they are more likely to reduce spending in other areas to maintain their monthly budget. A recession would still likely impact growth, so it is critical for gaming companies to protect revenue during a downturn.

Other developments also hold promise for the gaming industry. Casino stocks recently surged following China’s announcement of eased travel restrictions that would allow tour groups into Macau, the world's largest gambling jurisdiction. Overall, publicly traded gaming companies have enjoyed relatively strong earnings during 2022 despite market volatility, and many analysts have maintained “buy” ratings. A downturn could also give well-capitalized companies an opportunity to gain market share through acquisitions and partnerships.

Looking ahead: A sure thing

To help guard against the impact of recessionary pressures, managing costs and finding efficiencies will continue to be priorities. However, cutting back spending across the board can constrain growth and exacerbate customer churn. By combining financial discipline with a business strategy tailored to the effects of a potential downturn, gaming companies can continue the pandemic recovery and even thrive during volatility.

Article
Beyond weathering the storm: How the gaming industry can succeed during economically challenging times 

So far in our value acceleration article series, we have talked about increasing the value of your business and building liquidity into your life starting with taking inventory of where you are at and aligning values, reducing risk, and increasing intangible value.

In this article, we are going to focus on planning and execution. How these action items are introduced and executed may be just as important as the action items themselves. We still need to protect value before we can help it grow. Let’s say you had a plan, a good plan, to sell your business and start a new one. Maybe a bed-and-breakfast on the coast? You’ve earmarked the 70% in cash proceeds to bolster your retirement accounts. The remaining 30% was designed to generate cash for the down payment on the bed-and-breakfast. And it is stuck in escrow or, worse yet, tied to an earn-out. Now, the waiting begins. When do you get to move on to the next phase? After all that hard work in the value acceleration process, you still didn’t get where you wanted to go. What went wrong?

Many business owners stumble at the end because they lack a master plan that incorporates their business action items and personal action items. Planning and execution in the value acceleration process was the focus of our conversation with a group of business owners and advisors on Thursday, April 11th.

Business valuation master plan steps to take

A master plan should include both business actions and personal actions. We uncovered a number of points that resonated with business owners in the room. Almost every business owner has some sort of action item related to employees, whether it’s hiring new employees, advancing employees into new roles, or helping employees succeed in their current roles. A review of financial practices may also benefit many businesses. For example, by revisiting variable vs. fixed costs, companies may improve their bidding process and enhance profitability. 

Master plan business improvement action items:

  • Customer diversification and contract implementation
  • Inventory management
  • Use of relevant metrics and dashboards
  • Financial history and projections
  • Systems and process refinement

A comprehensive master plan should also include personal action items. Personal goals and objectives play a huge role in the actions taken by a business. As with the hypothetical bed-and-breakfast example, personal goals may influence your exit options and the selected deal structure. 

Master plan personal action items:

  •  Family involvement in the business
  •  Needs vs. wants
  •  Development of an advisory team
  •  Life after planning

A master plan incorporates all of the previously identified action items into an implementation timeline. Each master plan is different and reflects the underlying realities of the specific business. However, a practical framework to use as guidance is presented below.

The value acceleration process requires critical thinking and hard work. Just as important as identifying action items is creating a process to execute them effectively. Through proper planning and execution, we help our clients not only become wealthier but to use their wealth to better their lives. 

If you are interested in learning more about value acceleration, please contact the business valuation services team. We would be happy to meet with you, answer any questions you may have, and provide you with information on upcoming value acceleration presentations. 

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Planning and execution: Value acceleration series part four (of five)