We are coming off quite a few years of financial success across most sectors of business. However, our “coming off” has taken form as a sudden global health and economic catastrophe. Small businesses across all business verticals, have gone from enjoying tremendous success, to being shuttered literally overnight. Prior to the CoVid-19 Pandemic, conversations were had about “selling the business”, but what do you do now? Would you sell your business now? Could you sell your business now? The answer is yes, but it would be as easy as it would have been a year ago, and there are many realities to the current economic state which need to be taken into consideration.
Bottom line, the process is the same, but the parameters have been modified. Here I have addressed six higher profile parameters to a transaction process which have changed since the onset of the CoVid 19 pandemic. Be aware, these are not the only parameters which have changed, but taking these into consideration should help a business owner considering selling to better understand how the topography of a business transaction has mutated. Each one can be used as a steppingstone for the seller to maximize his/her enterprise value at closing.
- Buyer’s Market
There can be little doubt that in the coming months following the ‘re-opening’ of our economy that we will be in a period of a perceived buyers-market. It will be important to invest in whatever marketing apparatuses in order to return the financial health of the business back to ‘normal’ or at least upward trending as much as possible. If this happens, it will be easier to put less weight onto the Covid era financials. On the other hand, some businesses may be excelling during this time and when the crisis subsides, their financials may decline to pre Covid levels. In either case, weighting would still be reduced as the Covid crisis is hopefully a one-time outlier within the history of the business.
Good news can be found in the fact that there are buyers still interested in acquiring business opportunities. Yes, some might be looking for distressed enterprises that they can pick up at rock bottom multiples, but we have the belief that many will be similar to the same sort of buyers that we’ve always dealt with. From Equity Groups, Strategic and Financial buyers, the interest in a particular business usually comes down to the vision and end goals of that buyer. In the post Covid era, it will be more important than ever to prove a business ‘sea worthiness’ but remember that the silver lining is buyers are still active and that the entrepreneurial spirit will still be strong.
- Post Covid Valuations
While we might be taking a break from the pre Covid sky rocketing multipliers of the booming economy and scarce inventory conditions leading up to the crisis, there is no reason to think that companies that weather this downturn will experience bottomed out valuations. Multipliers will be more dynamic and intelligent. If your business thrived and continues to do well in the months after normalcy is established, you might see an increase in multiples, while if your business hit a brick wall financially during the crisis but jump started afterwards and is cruising back to profitability-then your multiples should sustain a reasonable value for your efforts. Will valuations most likely be lower than in the beginning of 2020? The answer is yes but with intelligent presentation and narrative, Sound Business Brokers should be able to present the best scenario for value in the market.
- Reliance on SBA Lending
It’s still too early to predict but if the last recession was any indication, access to SBA lending will tighten and most likely become more difficult, especially for transactions that don’t quite fit into a tidy box for a lender. From a seller’s standpoint, showing resilience through the crisis and progress afterwards will be one of the main factors an SBA lender will be looking at. The other will be direct industry experience of the buyer. This will be far tighter than it’s been in recent years as lenders would call for ‘translatable’ experience which was a broad enough definition that could cover a large variety of vague experience levels. We’re fairly certain that the definitions are going to be extremely strict for the near future. What this means is that while SBA 7a and 504 deals will still exist, most sellers should be open to pathways outside of the SBA world.
- Deal Structure
One of the best tools a seller can have in the post Covid world to maintain value and assist in a successful transaction is to be open to creative deal structure. This most likely means a heavier reliance on temporary seller financing, benchmark terms, or some other creative means of accomplishing the transaction. In general, these are increasing risk for the seller but in that increased risk is also increased value reward for being open to the uncertainty that comes with such an agreement. Have an open mind, commit to longer transitions, practice flexibility and the transaction will have a better chance for success.
- Heightened levels of due diligence
Due diligence is always an important piece of any transaction and that fact won’t be changing anytime soon. It’s noteworthy that buyers will most likely be diving deeper into the companies they are interested in. Sellers should just be prepared for this. Maintain clean books, respond quickly and with transparency, make your professionals and yourself available to the buyer and the heightened level of due diligence shouldn’t be anything to worry about.
How can a seller offset the effects of a distressed market? There is no silver bullet to offset the conditions of a distressed market. However, a business owner can take the above steps to minimize the reductive effect of the post Covid market. It is all about being “best in class”. Since we are in a buyer’s market, be the most desirable company in your vertical, or at least the most desirable of those on the market at any given time.
If a buyer is interested in acquiring a business in your vertical, be the one the buyer wants to look at! Have a plan in place upon which your business operates and bases its strategic decisions upon. If your plan is well crafted and executed, your company will be perceived as being the less risky proposition. This should result in you be not only the most desirable option, but it will reduce the effect of valuation erosion.
Be the option the bank perceives as being the least risky alternative. You want your bank to know you have a plan and are executing accordingly. If the bank perceives you as being the best risk options for the buyer, they may be more willing to participate as a funding partner in the deal structure.
It’s easy to get lost in the gloom of the Covid response and what it is doing to our economy but we believe that once we’re through this, the market will return and the pathways to sell and acquire business opportunities will again open. It’s up to us to recognize what’s different and adapt to new surroundings and opportunities.
Charles Morningstar and Wes Martin, CBI
Sound Business Brokers
M: 253-606-3788 Charles M:360-701-5602 Wes
Charles@soundbusinessbrokers.com, Wes @soundbusinessbrokers.com