Around the Web: A Week in Summary
A recent blog post from Exit Strategies Group entitled “Can you sell a distressed business?” explores the factors that impact the salability of a business in distress.
The ability to sell a distressed business is largely dependent on the ability to find a buyer who believes that they have the skillset and resources to turn the business around. In general there are four categories of distress:
- Manageable impact, event driven
- Unmanageable impact, event driven
- Manageable impact, systematic
- Unmanageable impact, systematic
COVID-19 would be considered unmanageable impact, event driven. In this scenario, it is unlikely that a new owner would be able to run a business any better than the current owner. However, under certain circumstances a good business broker would be able to attract a buyer that is able to utilize the businesses’ current resources to stay afloat by offering a different product or service that is currently in high demand.
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A recent article from Forbes entitled “The Good News For Your Business Valuation During Unprecedented Times” explains why the current pandemic is likely to have a smaller impact on your business valuation than you might think.
Business valuations are less likely to be impacted for most businesses for two reasons:
- Recasting The Financials – This practice allows a business broker to adjust the financials to compensate for any expenses or loss of funds that are considered unrelated, unnecessary or unlikely to happen again. A pandemic falls into the last category.
- Forward-Looking Business Valuations – A business broker will assess both the historical performance of the business as well as the future facts of the business. Both play a role in how much a company is worth.
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A recent article from Axial entitled “A Shift in Investment Strategies Post-Coronavirus – COVID-19 Virtual Roundtable” highlights the main talking points in a discussion regarding the current pandemic between nine Axial members.
In this week’s virtual roundtable, experts address topics including new and innovative capital structures, how government stimulus funds are impacting the private capital markets, and what’s happening with transaction dynamics. According to the nine members:
- PPP funding is helpful for businesses that are impacted immediately, and those in the service businesses who need to keep employees on the sidelines. For other types of businesses they may pose some obstacles.
- Permanent Equity rolled out a program called Safe Harbor that offers creative capital solutions to businesses struggling from the pandemic.
- Transactions have slowed but not come to a halt. Many transactions are likely to be on pause until an in-person negotiation is possible.
- Strategic buyers are on the market less, making more room for financial buyers to experience increased deal flow.
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Around the Web: A Week in Summary
A recent article from BizBuySell entitled “COVID-19 Stalls Q1 Transactions; Presents Once in a Lifetime Opportunity for Acquisitions” provides insight into the current state of the M&A market as well as actionable advice for both owners and buyers at this time.
Following the promising start to 2020, transactions took a 43% dip in response to the Coronavirus pandemic. However, the quality of the businesses that were sold improved based on recorded metrics. While many businesses are currently required to be closed, and the economy has been deeply wounded, the circumstances present a stunning opportunity for willing buyers. At this given time, buyers who are prepared can not only close the deal of a lifetime because prices are being driven down, they may also qualify for the SBA Debt Relief Program released this year. Owners can take multiple actions to increase the appeal of their business, with the most important focus being on reducing the risk the buyer would be taking upon acquisition.
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A recent article from Thomas Publishing Company entitled “Has the M&A Market Caught a Virus Too?” evaluates the implications of the Coronavirus on the M&A market.
It’s no secret that given the current circumstances, M&A activity has begun to slow. However, the reality of this downturn is much different than in past years, when the damage has been a result of economic problems. The external factor that is forcing a cessation of demand in this scenario is merely causing deals to be put on hold rather than stopped all together. For investors who are ready to weather the storm, there are great rewards on the other side of it. That being said, for the time being, the first priority is to ensure liquidity and solvency. Businesses have to survive the downturn before they can consider other options. Experts estimate that the current downturn will last approximately nine months before things start to look up again and considering the natural flow of the market, it is likely to be a buyers’ market for a while. Before COVID-19 it was a very strong sellers’ market, so this change has created space for a more level playing field.
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A recent blog post from Exit Strategies Group entitled “COVID-19 Exit Planning Insight: Keep a Journal” suggests that business owners begin keeping a real-time record of all relevant events and decisions during the pandemic.
When a business is sold, it is necessary to share the past three years of financials. Inevitably, the COVID-19 crisis will impact these records and leave the buyers with some pointed questions. It is in the best interest of owners to maintain a real-time record of every business decision that could impact the future of the company. It’s important that owners not try to rely on their memory and that they include things like the rationale behind the action and its expected outcome. Types of events and decisions to document include financial, customers, marketing, suppliers, employees, products & services, and strategic. When it comes time to list your business, your business broker can help you to tell your unique story, which will rely on accurate logs from this fragile time.
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A recent article from Divestopedia entitled “Cash Forecast Excel Tool: In Tough Times, Cash is King” provides actionable advice that business owners can use to navigate the current financial challenges.
The central theme for businesses trying to stay afloat during times like these is simple: be conservative. Most business owners’ basic instinct to save every dollar they can and narrow their focuses on continuing to turn a profit is reasonable. In this article is a checklist of tips for surviving the downturn, a tool to calculate weekly cash flow, and a list of questions business owners can utilize to perform a cash analysis.
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A recent article from Smart Business Dealmakers entitled “Coronavirus Has Disrupted, But Not Extinguished, M&A Options” discusses the benefits of the current market conditions for businesses, buyers and owners considering selling.
It is true that the current disruption to the economy is not ideal. Given the circumstances, it may seem as though negative consequences are all there is to look forward to. However, the situation at hand does present opportunities for the M&A market. For owners, buyers and sellers alike, here are some things to look forward to:
- Reduced Risk – For business owners looking to remain in business, now is an opportune time to consider bringing in a minority investor in order to grow the business or to reduce your personal risk as well as the risks for shareholders who may be concerned about their financial safety during a time like this.
- Buying a Company – During an economic downturn, there is also a leveling out of pricing. There is likely to be an increase in the number of businesses available for purchase, and with that will likely be a decrease in the average price of each company.
- Selling – As an owner, there are many reasons to consider the sale of your business right now. Whether it’s to avoid the difficulties that lie ahead or to put cash back in your pocket for security, there are plenty of investment firms and buyers on the lookout for new opportunities. While prices may decrease, the market will see an increased use of structuring tools such as earn-outs that may be enticing for some owners.
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A recent article from Axial entitled “PE Business Development Post-Coronavirus – COVID-19 Virtual Roundtable” provides the audio files and show notes from a discussion between eleven M&A professionals regarding the effects of COVID-19 on the lower middle market.
During their discussion, these experts discuss important questions such as:
- How is the business development ecosystem evolving in this time of upheaval?
- Are firms pressing pause on sourcing?
- Will investors change their mandates in response to the pandemic?
- How is time being spent differently right now?
- How have strategic acquisitions been affected?
For insight into these questions and more, access the recordings and the main takeaways from the discussion, as well as links to previous COVID-19 Virtual Roundtables.
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