Selling in the aftermath of COVID-19
The current COVID-19 situation has impacted M&A Activity. This is mainly due to two reasons. Sellers are hesitant to go to market due to fear that they may not get the desired value for their business, and buyers’ need to preserve capital, combined with limited financing options. While it might sound counter-intuitive, this might still be the right time for some business owners to sell and exit their business for the following reasons.
- High Dry Powder & Limited Listing Inventory: Currently, private equity firms are sitting on the highest reserve of dry powder. Over the last decade, low interest rates have driven investors into riskier alternative assets in search of higher returns. Despite the inflow of capital, private equity firms have been slow in deploying this capital as competition has driven up prices leading to higher multiples and lower returns. Now, as opportunities in the market dry up and valuations go down, financial buyers are eager to invest this excess capital. Fewer businesses for sale in the marketplace gives sellers a short window of opportunity to increase their visibility, thus increasing the likelihood of a sale.
- High Uncertainty: Businesses are still determining the impact of COVID-19. It is difficult to accurately forecast future profits as this depends on several variables, including policy implementation and governance. Experts in the healthcare and research space predict the effects of the pandemic to linger for extended periods until a vaccine is ready for large scale distribution. As such, it might be worthwhile to sell the business now than to experience extended periods of poor cash flow generation.
- Ensuring Longevity of the Business: COVID-19 has had an adverse impact on several businesses, leading to a liquidity crunch. Some companies have been hit harder than others and struggle to stay afloat. For such businesses with otherwise strong operating models, getting acquired by a buyer with resources will help them weather the storm and ensure long-term sustainability.
- Peace of Mind: By transferring ownership, business owners are transferring risk of future uncertainty. While they may not receive the best price for their business in the current market, business owners do not have to worry about the long-term impact of this situation. This will allow business owners to focus on other goals and have the option to invest proceeds from the sale in new opportunities that arise in the post-COVID phase.
If you are a business owner who initially planned on retiring within the next few years, it could be a good time to start succession planning in order to prepare the business for sale. In order to prepare your business for sale, you can start by taking the following steps:
- Organize your accounting statements, legal, and administrative documents
- Summarize the impact of COVID-19 on the business and an action plan that clearly outlines measures taken by the business to minimize impact on profitability
- Get a professional valuation from a seasoned corporate finance professional or valuation advisory firm and learn more about certain tax advantages associated with different deal structures
- Prepare a succession plan and identify key employees that need to be trained to take on management roles post transition
- Discuss goals and objectives with your business brokerage and advisory firm to make sure that they are working in your best interest to find the right fit for your business