Selling Your Business in a Post-Pandemic Climate
Markets are reeling coming off consecutive years of financial success across most business sectors. We were unaware at the start of 2020 that things were about to take a turn for the worse with the arrival of a global health catastrophe. Suddenly, small businesses of all sorts went from enjoying solid performance to shattering—literally overnight. The Coronavirus pandemic led to new conversations for companies that are contemplating selling.
Could you sell your business now? Should you sell your business now? Wes Martin, managing broker of Sound Business Brokers, says the answer is still yes but he also cautions that selling may not be as easy as a year ago. There are many new realities to the current state of fiscal affairs, but one thing remains unchanged: your business must be positioned to be the one the buyer wants!
For all intents and purposes, the process of selling a business is the same today as it has ever been. There are some parameters to be aware of whenever buying or selling a business that have mutated slightly. Sound Business Brokers encourages sellers to focus on five stepping stones toward brokering the best value for a business.
There is little doubt that the months following the reopening of our economy will be a perceived buyers-market. A critical factor to securing the best asking price for any business looking to sell will be to regain as much ‘normal’ financial health as possible. Another last marketing push may be needed to attain upward momentum. Provided that happens, it will be easier to weigh COVID era financials less heavily. Conversely, businesses that spiked during this period may be positioned as great investments proving they can perform during trying times—even if revenues return to pre-pandemic levels. Either way, financials produced during the shutdown are likely to be considered as outliers in the longstanding history of business.
The silver lining is that buyers are still interested and active in acquiring business opportunities. Yes, some may be looking for distressed enterprises they can pick-up at a rock bottom bargain, but for the most part, buyers are still the same. In Martin’s experience, it comes down to the vision and end goals any equity group or strategic financial buyer has. More than ever it will be important to prove the ‘sea worthiness’ of your business.
Although sky-rocketing multipliers of the booming economy have stalled, there is no reason to think that companies who weather this downturn will experience bottomed out valuations. With that said, sellers ought to enlist a reputable business broker who knows how to create a compelling value narrative. Multipliers will be more dynamic and intelligent once business bounces back and normalcy is established again. Even businesses that took a hit financially should be able to sustain a reasonable value once it’s on the way back to profitability.
Reliance on SBA Lending
The historically low interest rates are appealing to borrowers and the SBA can offer subsidized loan payments under the new CARES Act for loans closed before September 27. It is still too early to predict if access to SBA lending will become more difficult for prospective business buyers but if the last recession is any indicator it will eventually tighten.
Even if a seller can demonstrate adequate resiliency and rebound, the transaction may not quite fit into a tidy box for a loan qualification. SBA lenders may more closely factor in direct industry experience of the buyer. In the past, a broad definition of ‘translatable’ experience was used to cover a variable of experience levels. It is likely this definition will become extremely strict soon. SBA 7a and 504 deals will still exist, but serious sellers need to be open minded about alternative financing pathways.
Sellers willing to consider creative deal structures will benefit most in a post-COVID business environment. This could mean a temporary reliance on seller financing, benchmark terms, or some other imaginative ways of accomplishing the transaction. In general, any increased risk to the seller can be negotiated. Keep in mind that the reward will be reaching a mutual agreement of value. Sellers should flexible and willing to commit to longer transitions for a successful outcome.
Heightened Levels of Due Diligence
Due diligence is always an important piece of any transaction and that will not change. Be prepared for buyers to dive deeper into the details of any company they are interested in. This is nothing to worry about. A seller merely needs to make sure their books are accurately maintained and available for review. Responding quickly and transparently to any questions will help propel the deal forward. There should also be an operational plan in place that reflects the overall strategic direction of the company. A well-crafted and executed plan will bolster the perception of lower risk and present your business as the more desirable option. Dotting all the I’s and crossing all the T’s will ultimately minimize the impact on valuation.
There is no silver bullet to offset the conditions of a distressed market; however, a business owner can take the above steps to minimize erosion of valuation in the current market. Amid a buyer’s market, it is all about being “best in class” and the most desirable within your vertical at any given time. Ideally, you will be perceived as low risk to the bank and as best option for the buyer.
Lastly, Martin encourages business owners not to get lost in the gloom of how this pandemic has stagnated our economy. The market will return. Buyers are waiting for business opportunities. Acquisitions are on the horizon. The key is recognizing what will endure. Read the most recent BizBuySell Insight report.
Content contributed by Wes Martin
Managing Broker, Sound Business Brokers