The time was right to sell. As the calendar turned to 2020, a tremendous amount of capital available from both buyers and lenders created a favorable market for sellers. For those of you who were hoping to take advantage of this favorable market, COVID-19 has come at an inopportune time, to say the least. Like just about everything else, most business sale processes have been put on hold as everyone attempts to gauge the impact of the pandemic on their business and industry.
While delaying a sale process is unfortunate, we encourage you to remain hopeful. Based on activity levels prior to this pandemic, and the liquidity that remains in the market, deal activity will again resume as we move past COVID-19. However, sellers should be aware that a post-COVID-19 sale process may look different from what was the norm over the past few years. In particular, we expect buyers will heavily focus on questions such as:
Below, we have listed recommendations to help you answer these difficult questions and, ultimately, proceed with a sale as smoothly as possible once market conditions rebound.
While this may seem like a no-brainer, staying solvent goes beyond simply ensuring a business remains open during this pandemic. In a future sale process, buyers will focus on how cash levels were managed during this challenging time, this being a great indication of your company’s ability to generate and manage future cash flows in a healthier economic environment.
Future buyers will need to know the financial impact of COVID-19 so they can properly value your business. This will help to create a ‘normalized’ view of your last 12 months of earnings, a key driver of business valuation. Items to consider include:
In addition to quantifying the historical impact to your business, it’s a good idea to revisit your 2020 and 2021 forecasts. Likely, any forecasts completed earlier this year are no longer valid. Buyers will want to understand the impact of COVID-19 on financial projections and to your industry as a whole. Candidly assessing the “new normal” will be critical, including the timeline of how your business will return to 2019 levels of performance and if your current cost structure is appropriate for that timeline.
Identifying and quantifying these items now, while it is happening, can save significant time during a future sales process and ensure all appropriate items are captured.
COVID-19 has created an opportunity for business owners to prove themselves during a dire time, and businesses that perform well relative to others may receive a premium on the market upon a post-COVID sale. Business owners must take pointed corrective actions tailored toward the shifting economic landscape. Examples may include:
We acknowledge that for many businesses, corrective actions may include assistance from the federal government. We urge you to visit our COVID-19 Resource Center for more information on how various loan and stimulus packages may help you during this time.
The economic slowdown as a result of COVID-19 will undoubtedly cause buyers, and the lenders funding their deals, to be wary. Bank lenders may be overwhelmed with administering emergency government funding programs and non-bank lenders may be experiencing their own liquidity issues.
As in any slowdown, valuations on most businesses are likely to move lower in the near to medium term. Further, the impact of COVID-19 and related shut-downs to your business 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.
Also, take a step back and consider whether a sale is still the right strategy. Given potentially significant shifts in your market or industry, maybe a more gradual exit or partnership through a minority equity and/or mezzanine debt investor is the more appropriate option to maximize your value. One of those alternatives could help add liquidity to make enhancements to the business, take some chips off the table (realizing some near-term cash without giving up full control) or simply help you take advantage of the expertise of investor groups.
Your business will likely have more capacity available; what will you do with this additional time? While cash may be tight, business owners can make improvements that can increase valuations in the future.
Examples include:
We will continue to update our website with material designed to help you during this difficult time.
Contact Justin Thomas at jthomas@cohencpa.com, Tim Maynard at tmaynard@cohencpa.com or your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.