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’s 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 M&A Markets….
Time will tell whether the Fed and other central banks around the world can stabilize stock markets. There’s not much room to go with rate cuts so perhaps injecting money into the system will prove to be a more potent lever. So far, such measures appear ineffective in stemming falling stock prices. Regardless, public company valuations have been significantly impacted, which normally creates a ripple effect through to private company valuations. How does this all affect the M&A market? Usually, during uncertainty, buyers 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. 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) 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 implement ‘work from home’ routines to the extent possible – both as a disease prevention measure and 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. 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.