s the COVID-19 pandemic swept the world, business owners who were planning on selling their business were bracing themselves for the very worst. Similarly, owners of businesses that were negatively impacted by the pandemic are facing the dilemma of whether to keep a loss-making business, or sell it off and try and salvage some of the capital they invested into the business.
Would anyone really want to buy or sell a business during the COVID-19 crisis? Recessions come and go, but the pandemic brought about an economic tsunami.
There are a number of issues to be considered and questions to be answered to help business owners determine when the time is right to sell. With the right answers, avoiding a bad decision may be the key for getting the deal done.
Why were you thinking about selling in the first place?
Consider what is driving your decision to sell. Are you ready to retire? Is a health situation affecting your ability to work? Is a new competitor bringing a product or service to market that will upend your business? Some of these factors are more time-critical than others. A health issue may require an immediate sale regardless of current market conditions, while a personal retirement plan can be more flexible. Perhaps your competitors are struggling, leaving better opportunities for your business?
What would happen to the value of your business?
Normally, the greater the uncertainty, the greater the risk, the less buyers are willing to pay. As in any slowdown, valuations on most businesses are likely to move lower in the near to medium term. Even businesses which are booming as a result of the pandemic (such as those producing sanitation products), may be affected negatively because buyers may expect the current uplift in business to be only temporary.
Further, the impact of COVID-19 and related shut-downs will cause more uncertainty regarding how past performance connects to future results, which may lead to a wide range of valuations. Given these factors, many post-COVID-19 transactions will likely include an ‘earn-out’ to cover a portion (possibly a significant portion) of the ultimate purchase price. With an earn-out, a portion of the purchase price is deferred and paid to the seller only as the business meets agreed upon post-close targets.
Would a delay in selling hurt, or help, your business?
If your business is able to remain solvent and maintain a positive cashflow, you should consider delaying selling it off and use the time to stabilise the business and prepare it for sale. Business owners who are able to update their financial forecast and present a strong case for why their business will not be significantly impacted by COVID-19 over the next several years will have a better chance of differentiating themselves with buyers. These sellers may still want to consider moving forward with a sale process once the current market volatility subsides. We also believe sellers who adjust their mindset, show a willingness to be more flexible on deal terms, and who recognise that the transaction process is going to take longer in this new environment are likely to be at a competitive advantage.
Would transactions be conducted differently?
We expect the due diligence process to include questions that help buyers better understand the specific impact of COVID-19 on the business, and its general level of preparedness for a global pandemic. For example, does the company have a business continuity plan, and has that plan been stress tested? Do employees have the ability to work remotely, and what technology systems are in place to allow them to do so?
Purchase agreements may also include proposed language that gives buyers the right to walk away from the deal if there has been a ‘materially adverse effect’ on the business as a result of a pandemic, including COVID-19. Buyers and sellers will likely end up reaching a compromise where the buyer can call off the deal only if it is determined that the pandemic has had a disproportionate impact on the business as compared to other businesses in the same industry or geography.
Are there any potential buyers out there?
Data from the UK suggests that there is a sudden emergence of an aggressive buyer’s market. Buyers have cash and they are moving in to make quick gains. Indeed, over the last few months we have seen a spike in enquiries in Gibraltar particularly for businesses that have managed to operate both on-site and remotely.
In conclusion, while the impact of COVID-19 may present new challenges to business owners currently considering selling their business, it also presents an opportunity for buyers to get their hands on interesting businesses. There are many tasks to be performed in order to effectively prepare a business to be marketed for sale, and it is important to engage advisors to understand what you can do now to prepare your business for sale when the time is right for you.