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March 21, 2011 marked the first anniversary of the passage of the Affordable Care Act (ACA), commonly dubbed ObamaCare. Most business owners know the health care reforms under ObamaCare include unprecedented government mandates on employers. Many owners, however, have yet to come to grips with the effects of the new law on bottom line profitability simply because many aspects of ObamaCare remain uncertain, at best.

Uncertainty also impacts the business valuation process because valuations directly correlate to the forward-looking profitability of a company. A business valuation applies the same basic principles in evaluating risk as, say, the corporate bond market. As the risk of seller default on the bond increases, the bond interest rate will also increase to attract willing buyers. Likewise, as a company’s earning projections, or asset values, become increasingly less certain due to health care reform, rational buyers will discount their bid price in the amount of the “ObamaCare Risk Premium” to compensate for the uncertainty.

Rational discounting to compensate for unwanted risks associated with ObamaCare is clearly evident in the case of The Society of Lloyd’s, the worlds leading insurance market. Lloyd’s recently instructed its underwriters to “consider most carefully the cover they are providing to ensure that it is not caught by the ACA… Any proposal to provide coverage that falls under the ACA umbrella, and which involves providing unlimited cover, will be considered a material change to the syndicate’s business plan by Lloyd’s. Syndicates will therefore require business plan approval prior to commencing underwriting.”

Uncertainty is surely the keyword for companies dependent on low-wage workers in the era of ObamaCare. As the law currently stands, companies staffed with low-wage workers can expect to take a big hit starting in 2014 because their minimum coverage, cut-rate employee health insurance policies do not comply with the new law. These companies will have two choices: offer an unlimited insurance minimum, or reduce their workforces. According to Howard Schultz, CEO of Starbucks, “as the bill is currently written and if it was going to land in 2014 under the current guidelines, the pressure on small businesses, because of the mandate, is too great.”

Given recent court challenges to ObamaCare and political jostling in Congress and State Legislatures, uncertainty is the hobgoblin expected to distort profitability and the business valuation process for many companies in the foreseeable future. ObamaCare may enhance the valuations for some companies due to tax credits. However, ObamaCare presents significant risks to other companies due to increased taxes and penalties.

With all the uncertainty about mandates imbedded in the current version of ObamaCare and unknown mandates still to come, who’s to say how these mandates will effect the business appraisal of your company? That’s where we come in. We are your uniquely well-qualified resource for business appraisal, forensic accounting and litigation support in the era of ObamaCare. Our teams of CPAs, Accredited Senior Appraisers and Certified Business Appraisers stay well-informed about mandates in the current version of ObamaCare and closely monitor future reform efforts, which will likely further complicate the business appraisal process. To quote Bilbo from J.R.R. Tolkein’s “The Lord of the Rings,” “It’s a dangerous business, Frodo, going out of your door,” he used to say. “You step into the Road, and if you don’t keep your feet, there is no knowing where you might be swept off to.”

Accuracy is our agenda that helps you “keep your feet” through the business appraisal process.

References:

Lloyd’s quote

http://www.lloyds.com/The-Market/Communications/Regulatory-Communications-Homepage/Regulatory-Communications/Regulatory-news-articles/February-2011-Affordable-Care-Act

Howard Schultz quote:

http://seattletimes.nwsource.com/html/businesstechnology/2014461881_starbucks13.html

Bilbo quote

“The Lord of the Rings;” Chapter 3; J.R.R. Tolkien: HarperCollins, 1994