As the media continues to report on companies suffering from the pandemic, we have been fielding questions from business owners asking, “Can I sell my business in the time of COVID, and if so, will I get a fair price for my company?”
The short answer is “yes.” Private equity firms still have $830 billion to invest, and strategic buyers (while being more conservative with their cash these days) are still acquiring companies that can add value to their organization.
Private equity firms still have $830 billion to invest.
The M&A market has changed of late.
The COVID-19 crisis has introduced uncertainty, and because much of a company’s value lies in its future cash flow (and the predictability of its cash flow), the “risk of COVID” has forced buyers to scrutinize a business and its future cash flows more than ever. Thus, for business owners thinking about selling, it’s important to take a close look at some key areas of the business.
Here are five key areas buyers will focus on as they analyze potential acquisition targets during this pandemic:
- 2020 financial performance and 2021 projections
- Customers’ and suppliers’ financial health
- Supply chain robustness
- Workforce distancing capabilities
- Creativity in the deal structure
- Future financial performance
Buyers will want to have a solid understanding of the drivers behind this year’s financial performance, determining why Customer A has spent X% less and Customer B has spent Y% more. Showing a solid grasp of 2020s numbers will give your 2020-2021 projections much more credibility. Additionally, revenue and profit projections shared with the buyer should be based on the highest probability of meeting or exceeding them, rather than having to explain, during due-diligence, why revenues and profit fell short. Concurrently, your top expenses should be examined as well. Consider:
- Are there any unexpected increases or decreases?
- Are you making necessary investments in the business, while still focusing on conserving cash?
Demonstrating that the company moved quickly to implement plans, products or services to respond to new opportunities and customer needs brought on by the pandemic will reflect well on your management team . One specific way in which many businesses can justify their future growth potential is highlighting their uniqueness in the marketplace. Companies that offer customers a product or service that is “mission critical”, such as a software provider or a third-party logistics provider, are in a better position to sell at a premium.
- Customers’ and suppliers’ health
Your company’s performance and financial health is the first consideration for a prospective buyer. The next consideration involves your customers and suppliers. Normally, long-term contracts are a sure-fire way to prove your company’s future stability, but in this environment, when customers make requests to amend or extend terms or even terminate contracts entirely, it’s important to demonstrate a strong understanding of your customers’ and suppliers’ current financial health and business outlook. Gone are the days of showing a potential buyer a stack of signed contracts and calling it a day.
- Supply chain robustness
Supply chains in all industries are being strained. Buyers will want confirmation that your supply chain (both upstream and downstream) can sustain temporary setbacks. Can your business withstand a supplier shutting their factory due to a coronavirus outbreak? What if your distributor can no longer finance their inventory due to cash flow problems?
- Workforce distancing capabilities
Whether this is having a workforce that can work from home or providing a work environment in which employees can safely distance themselves from one another, a potential buyer will want to know what measures can be put in place should a “second wave” of COVID-19 occur.
- Creativity in the deal structure
While we await the development of a vaccine to combat COVID, there will be a tendency for buyers to be overly cautious, and as such, buyers and sellers will need to be creative in order to bridge valuation gaps. Earn-outs will become more prevalent as a way for a buyer to remove some future risk while still allowing a seller to receive consideration for their efforts. We at Aethlon tend to discourage our clients from accepting earn-outs, but in order to close a deal with the “risk of COVID” present, an earn-out may become a necessary component for deals in the next 6-12 months.
These are just a few considerations.
Every business is unique, and potential buyers will focus their due-diligence on different areas– but these are the five areas we recommend you start to examine. If you would like to have a conversation with us about the market and how your company might be received by potential buyers, please reach out to us. We would enjoy talking with you. We pride ourselves on understanding the current market situation and helping our clients shape their narrative to maximize their valuation and sale proceeds.
Aethlon Capital is a Minneapolis-based investment bank that specializes in mergers and acquisitions and raising capital for manufacturing, technology, consumer, and transportation & logistics companies.
Our professionals would enjoy the opportunity to discuss your company’s growth plan or exit strategy. To find out how Aethlon’s investment banking services can help you, call Sima Griffith at 612.338.6065 or email sgriffith@aethlon.com.
