CityBusiness April 10, 2020 https://bit.ly/3kihMxq
By: Taylor Gilbert
On the whole, it is not a great time to begin selling a business. Companies and consumers have retrenched, and the market contraction is expected to be very sharp and deep between the first and second quarters of 2020. Financing markets will be difficult to access, as capital providers struggle to adequately assess risk of investments. Until companies can forecast their earnings with any degree of certainty, traditional deal activity will be at a virtual standstill.
Emotions often take over in difficult markets, confidence wanes, and an urgency to panic can take hold. Your plan to exit your business this year has been derailed by COVID19 and the lockdowns the followed. What should you do?
In these difficult times, it is critical to keep an eye toward the long term and best practices. Investors and capital will continue to flow into attractive assets. Buyer’s will still seek deal opportunities, particularly in resilient industries like technology and certain ends of healthcare, or in cases of beleaguered sell-offs. After these first-order impacts, companies with solid balance sheets, ample cash flow pre-crisis, fewer execution concerns, and long-term potential will be jewels emerging from this crisis.
If you were planning on selling or were hoping to sell soon, here’s what we recommend you stay focused on:
Cash. Without question, cash is at a premium right now. The Federal Reserve’s efforts to prop up the banking system and the government’s relief programs to small and medium-sized businesses should help companies stay liquid and weather the immediate crisis with employee bases intact.
People. Your key employees are your arsenal to navigate the challenges ahead. A strong management team will ensure the continuity of the business, and can help preserve and protect customer relationships. More importantly, your key employees will allow the business to become more efficient, adaptable and intelligent during and emerging from the crisis.
Mission. Stay focused on your company’s vision or mission. It’s difficult to be immune to the distractions and the hard choices that must be made in times of crisis, but when possible, refocus your sights on the next milestone that ensures your company’s long-term prosperity. Crises usually bring about innovation and new business ideas, as well as show the cracks in the foundation of some businesses. As the world changes, the companies that keep an eye on the horizon and seize emerging opportunities will come at a premium.
Prudence. Another potential outcome of this crisis is hostile M&A and bargain deal seeking, with companies in relatively strong positions moving on those that struggle to recover. Be wary of the unsolicited offer from a buyer that wants your company at a steep discount. These typically uninformed offers tend to be mostly one-sided favoring the buyer and may have out-of-market or even onerous terms.
Advice. Seek valuable information from trusted advisors. Experienced advisors will help you to understand things outside your comfort zone, whether that’s liquidity strategy management, the value of the business, accessing capital, tax planning under recently changed laws, or assessing legal or regulatory risks in this new environment. Good advisors spare you from wandering aimlessly in uncharted territories and ensure an efficient deal process when you are ready to go to market.
So, when do you exit? We, like all investors and consumers, are analyzing what the future holds and what that means from an economic, and therefore, M&A perspective. The key metrics we are watching for to see deal activity ramp back up are (i) solid dynamics in funding markets; (ii) evidence of revenues and cash flow returning; and (iii) diminishing volatility in equity markets.
While nobody has all the answers, and business owners will inevitably be faced with difficult decisions over the days and months ahead, the record of past recessions and pandemics suggests stability will return and markets will recover. Resilience should eventually translate into advantage when you are ready to exit.
Taylor Gilbert is vice president at Chaffe & Associates, Inc. Investment banking services offered through Chaffe Securities, Inc., member FINRA/SiPC.