Perhaps you have been thinking about selling your business in the next year or two, having heard about the robust M&A market and high sale values in recent times. You may have even begun some planning in this regard.
However, with the COVID-19 pandemic continuing its spread, impacting our lives and businesses, it is difficult to focus on anything but the immediate day-to-day challenges, let alone exit planning.
We have witnessed many business downturns over the years; the difference this time is the enormous uncertainty of the health crisis, how long it will take to abate, and how much longer it will take global businesses to recover.
The silver lining is that there are some concrete steps business owners can take, even in this uncertain environment, to preserve the health and value of your business and prepare for an ultimate sale.
First Some Background on Current Markets….
The Federal Reserve and other central banks around the world have been aggressively pumping liquidity into their respective economies to stabilize stock markets. In the US, the Fed has unleashed measures that have outstripped its 2008 efforts during the financial crisis, with rates cuts, asset purchases and expanded lending facilities.
Congress has approved a stimulus package worth close to $3 trillion starting with the $2.2 trillion Cares Act followed by an additional funding package of ~$600 million to top up the small business loans program. These interventions have proven to be a potent lever on markets, halting the sharp decline in March propelling April to post the best gains on record since 1987. The economy, however, is suffering with a record first quarter 4.8% drop in GDP, the worst since 2008.
How does this all affect the M&A market?
While there is usually some correlation between stock market values and private business valuations, in these times of massive monetary policy interventions propping up stock markets in the face of a decimated economy, this correlation diverges. Private businesses are struggling to see ahead a week or so at a time, much less be able to create a credible 3-year forecast for valuation purposes.
During an uncertain economy, buyers typically sit on the sidelines waiting for things to settle. For strategic buyers who have adequate capital reserves, many will view this as an opportunity to seek out desirable acquisitions that fulfill a particular need, such as a sought-after geography, customer base or technology. However, their perceptions of value will reflect the inherent riskiness of the economic environment and business outlook. Private equity buyers are continuing to evaluate add-on acquisitions which augment existing portfolio investments.
We are still seeing interest for well-located, technology-driven operations, but buyers are being a lot more selective, are value-focused, and taking longer to act.
Steps Business Owners Can Take Now to Prepare & Preserve Value
In weathering downturns over the years, acting fast and decisively, and having a ‘plan B’ to adjust as circumstances change, is paramount. Revenues and cash levels usually fall faster than expenses – so bear this in mind as you chart your course in turbulent waters.
- Sustain Operations – as best you can continue to provide essential services to customers; they may have weathered previous downturns with you and are likely suffering this as well. Where possible, consider giving additional grace periods on normal business terms. Be flexible and adaptable – as the world changes, so must you.
- Strategic Plan – for how your business will survive through supply chain disruptions, revenue slowdown, etc. Imagine a range of possible scenarios and have a plan for each contingency.
- Sales Forecasts – deals that seem likely to close may be delayed or put on hold indefinitely. Even loyal customers may need to drastically alter their buying practices, so don’t assume past behavior will continue.
- Cash Resources – how much runway do you have to sustain possibly several quarters of business declines? Take stock of where you might be able to trim expenses and conserve cash, both in the near term and longer if needed. Plan for contingencies.
- Funding Sources – do you have access to additional equity or debt funding should you need it? With interest rates at record lows (and heading lower as central banks make further cuts) and more SBA loans being made available, your bank may be an important partner to keep your business afloat. Best to have these conversations sooner vs. later as the need becomes more acute.
- Team – focus on motivating your team and keeping them engaged as you implement ‘work from home’ routines. Recognize the need to accommodate parents who may need to do double duty caring for children whose schools have closed. Not all businesses can do this, such as manufacturing and certain services, but many can. Cease or minimize business travel where feasible.
- Discretionary Spend – you may want to reconsider marketing and customer acquisition budgets and establish a higher target “ROI” for such expenditures. Re-examine capital expenditure plans, and decide whether to wait until you have more visibility on the economic picture OR whether it makes sense to forge ahead regardless (assuming sufficient capital reserves) perhaps gaining an edge on your competition as you emerge well-positioned in the eventual economic and business recovery.
- Hunker Down – this could last longer than you think. Conserve cash, plan for the worst and be strategic with every decision. In these Darwinian times, “survival of the fittest” is the modus operandi where the most adaptable species will prevail. Businesses that do so successfully will emerge from this crisis, stronger, fitter and more valuable, making them more attractive to buyers when the M&A markets return to normalcy.
If you have any questions on the impact of COVID-19 on your business or the potential saleability of your business, don’t hesitate to reach out.
Written by Jan Robertson, SiVal Advisors LLC, jrobertson@sivaladvisors.com May 2020