Selling a business in the current period of lockdown is obviously impossible. The immediate current uncertainty means even deals that have progressed a long way through due diligence are on hold. Most businesses are wrestling with significantly reduced revenues as the immediate fallout of the Covid-19 pandemic. Indeed large numbers of businesses currently have a zero revenue stream. While the initial task is just to weather the cashflow impact over the period, what might the implications be for business value, once the economic world has returned to some semblance of normality?
Business Value Impact
In our opinion the actual P&L results over the period of March 2020 to whenever normality resumes will be largely irrelevant to the future valuation of a business. A buyer cares what the business will deliver for them, and notwithstanding another pandemic, they are unlikely to experience similar circumstances.
Buyers will however be very focused on the degree to which business performance recovers to activity levels equivalent to before the pandemic. Where they bounce back to similar levels of turnover and margin, the short term blip in results will be ignored. The P&L impact can be adjusted out of the numbers as an exceptional item.
However, the following are likely consequences of the pandemic:
- some businesses will fail
- others will have burnt through significant cash reserves and be cautious about investing
- unemployment will rise
- taxes will rise (to start paying back the enormous sums borrowed by the government)
- individuals will feel poorer and curtail spending.
The consequence of all of the above is that many businesses may experience an extended period of lower revenues than prior to the pandemic. Where this is perceived to be the ‘new norm’ in terms of activity level, it will affect the valuation when selling a business.
Wider Economic Climate For Selling a Business
Affordability and cash availability will obviously influence both deal value and deal structure. Potential buyers may need a period of consolidation after Covid-19 to replace depleted cash reserves. This means it could be some time before buyers start putting their nose above the parapet in large numbers. Alternatively (or in addition) they may look for a larger portion of the transaction value to be deferred. Finally, there may also be a general sense of there being ‘easy pickings’ available – a number of wounded businesses at distressed prices that should be explored first in any acquisition strategy.
However, it is not all doom and gloom. The economy will bounce back and regardless of the macro climate, there will always be a market for good businesses. In the same way that it is very hard to perfectly time the sale of shares at the top of the market, so it is with selling a business. The typical drivers for an owner to sell their business are that they have something better to do with either their time or the money invested in the business. If that point happens to occur at a less than optimum point in the economic life-cycle, rather than automatically shelving a sale, a seller should look to their experienced business broker to explore creative ways to extend the area of overlap between the needs of a seller and a buyer and in that way improve the chances of a successful transaction.
Morton Christie
We are always pleased to have a chat and try to give some honest advice about potentially selling a business. Whether you have questions about the potential timing of a sale, the sale process, or a conversation about the value of a business, please get in touch. We aim to arm you with the information you need to make an informed decision. Morton Christie services are aimed at businesses with a value in excess of £250,000. For smaller lifestyle businesses you may find it useful to contact our sister brand sellmysmallbusiness.co.uk
In the meantime, may you and your families keep safe.
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