In order to achieve optimal results when selling a business, it is crucial to sync both internal timings with external timing. Internal timing consists of aspects that are personal to the business owner (ex: wanting to retire at 65), while external timing includes factors surrounding the business’s specific industry or the economic landscape in which the company operates. While predicting and perfectly aligning both internal and external timing is next to impossible, the coronavirus pandemic has created a new outlook for business owners on how to sync them in the future.
Many business owners who were previously looking to sell and retire pre-pandemic are now concerned that they won’t be able to sell for years, or maybe at all. However, this is not necessarily true. Buyers purchase businesses for different reasons and qualified buyers with capital are always looking for opportunities, no matter the market conditions. In this article, we're going to look at how business owners can best position themselves to exit their business post-COVID.
COVID’s Impact on Businesses
The impact of COVID-19 on small businesses remains unprecedented. Yelp's Economic Average Report, which monitored temporary business closures as well as closures that became permanent, stated that as of late August 2020 over 97,000 businesses have permanently closed. This figure represents 60% of all temporary closures. In other words, over half of the businesses that temporarily closed shut their doors for good.
What makes this pandemic financially destructive is that when you boil it down, it has to do with people, their proximity to each other, and the regulations put into place by local districts to keep people safe. As such, this manifests itself in how consumers elect to spend their money as well as how they are allowed to spend their money. What this produces is an uneven distribution across businesses that have been affected.
Home services, professional services, consumer products, automotive repair (and others) have been able to withstand the effects of the pandemic better than other industries like tourism and hospitality. However, even within certain broader industries, variances exist. For example, restaurants that were already positioned well for takeouts, such as pizza places and coffee shops are surviving whereas fine dining and other types of restaurants that really lean on the in-person experience have the highest closure rates.
However, not all is bleak. From the ashes, there is a sense of resilience among small businesses across the country. Some businesses have adapted and effectively transitioned to new operating models while keeping their employees and consumers safe. Further, early evidence of an economic recovery is emerging across the nation in the form of business reopening.
What This Means for Selling Your Business
As noted above, there really is no hard-set rule around exit timing and it can certainly vary from seller to seller based on their unique situation. Almost every business can sell; however, it will be a function of price and terms (more on this below).
While external timing can’t be controlled per se, business owners need to be educated about the changes taking place within their industry and the geographical region(s) in which they operate. A forward outlook on such variables should all be considered as an owner looks to determine the optimal time for their sale. In the next sections, we will discuss some of the short and medium-term recovery actions prospective sellers can take as they prepare for a sale post-COVID.
Short Term Recovery
The COVID-19 pandemic and resulting economic crisis have prompted the U.S. government to provide assistance to small businesses across the country by way of deploying capital and support to help affected businesses persevere and recover.
The most common form of support came in the form of the Paycheck Protection Program (PPP) loan- which is an SBA-backed loan designed to help businesses keep their workers employed during the COVID-19 crisis. What was unique about the PPP loan is that it could be forgiven in full. Business owners, in anticipation of a sale of their business, should prepare by working with their PPP lender in order to determine the protocol for forgiveness. If a business is to be sold, the borrower must notify the lender prior to closing and if exemptions aren't met, the sale can require the approval of the SBA. In most cases, the existence of a PPP loan will not be a deal killer, but rather result in postponements to the completion of a transaction.
The full notice can be found here.
Medium Term Recovery
While cash may be tight in the near term, business owners can still make improvements that can increase valuations in the future.
There is no doubt COVID-19 has sped up the adoption of technology. A key question people are asking is: how will the pandemic have altered various industries forever? Will work from home, virtual events, contactless payment, remote queues be the new standard?
As a business owner looking to optimize value prior to the sale of your company, you need to reflect on your business and your industry to determine which technologies can be implemented to enhance efficiency and match with what consumers come to expect. For retail, this can mean virtual lines, contactless payment, and an e-commerce presence. For food & beverage, this can mean QR code menus and virtual events. And so on...
New Sales Channels
One of the real challenges any small business faces when exploring new sales channels is attracting the right audience, and once they do, instilling a sense of legitimacy into their offering. This couldn’t be more true during the COVID-19 pandemic as businesses frantically pivoted to new models and positioned themselves in front of new customer bases. Luckily, teaming up with major e-commerce players like Amazon solves these problems; they provide instant traffic and credibility.
For a nine-month stretch from the beginning of the pandemic until early 2021 (specifically April 15, 2020, to January 15, 2021), Amazon third-party sellers- almost all of the small to medium-sized businesses- increased their sales by more than 55% compared to the same period a year earlier.
While we are beginning to see a light at the end of a seemingly endless tunnel, it’s certainly not too late to explore a complementary channel to your sales mix. When executed successfully, this can have a tremendously positive impact on company value.
The world is watching the buzz around vaccine distribution and administration. Finding creative ways to insert yourself into this discussion can be a way to capture this unique window of opportunity.
Krispy Kreme garnered headlines by offering free doughnuts as an incentive to get vaccinated. The chain committed to offering a free original glazed doughnut to anyone who shows their vaccination card for the rest of 2021. Further, they plan to deliver treats to frontline workers and volunteers at vaccination sites as the effort for community protection pushes forward. The promotion is one of the many “giveaways” for individuals who have received their vaccinations.
Creatively riding the wind of major headlines like this is a great way to attract eyeballs as well as boost the reputation of your brand.
What Buyers Want to See
As discussed above, buyers purchase businesses for different reasons. However, sellers should be aware that a post-pandemic sale process could look different from what was considered the norm over the past few years. In particular, buyers will be heavily focused on questions such as:
- What was done to manage cash during the pandemic?
- Was any debt taken on as a result of the pandemic?
- How did the business perform during government-mandated shut-downs and correlating delays?
- Has COVID-19 created any structural changes to the company’s industry?
- What debts exist with the business?
- How are the month-by-month recovery and near-term forecast looking?
In addition to what buyers will inquire about, access to SBA financing will likely tighten up for transactions that don’t match the exact criteria for a lender. For sellers, this means two things:
1) showing resilience through the pandemic as well as advancement as we move forward (both mentioned above) will be a major factor, and
2) being open to exploring financing options presented to you that are outside the world of SBA.
A differentiator for you as a seller will be to articulate the company’s performance of the business before, during, and after the crisis period will be a major selling point. To validate this, ensure financial accounts are thorough and contain detailed comments explaining events and decisions. It will be important, now more than ever, to clearly illustrate to prospective buyers (and their lenders) the resilience of your business, even in the worst of times.