Business sales during a pandemic
COVID-19 has introduced us all to new challenges, at home and in business.
The business challenges started with difficulty in the supply chain, then employees started to test positive leaving you short-handed, followed by the Governor shutting down many businesses completely. Even those essential businesses faced the challenge of getting employees comfortable coming to work and working with a sales force that cannot visit many if not all customers. This all was compounded by fear and uncertainty which is always a major challenge to any business owner.
Despite the challenges of doing business during a pandemic, the acquisition market will continue search for good businesses to acquire. Private equity firms have a great deal of capital to deploy and a defined time frame to meet investment goals for their investors. And corporate buyers continue to pursue opportunities making acquisitions that will provide new customers, new products and new talent.
At Focus Capital, the phone is still ringing with calls from buyers and investors actively looking for investment opportunities in the family business category. Interest rates remain historically low and banks remain anxious to provide the funding.
COVID-19 has provided some new additions to the due diligence list when evaluating a merger or acquisition. Increased emphasis will be put on the supply chain and employee back up. The worry that a business (or businesses) will move its manufacturing to China will now be tempered by; how can the business source it's products elsewhere if needed. And how quickly. Dependence on a few suppliers will be viewed negatively and diversity in the supplier base will be a positive. Cross training and back up in key positions in the business will also be very important.
Dependence on a small group of customers, suppliers or employees has always been a concern to buyers. Every business should work on reducing that dependence, although that is often easier said than done. A number of very talented people are on the sidelines right now as a result of the pandemic stay at home orders. High-quality people would rather be working that sitting at home collecting government unemployment. This is a great time to be searching for new talent that can and should lead to finding new customer opportunities, new service offerings and possibly new technologies. People are the engine that makes a business go so use this time to look for the new talent to make the business more valuable.
Many believe we will see manufacturing return from China, however I suspect this will still be a slow process. Having the ability to build and/or assemble products in the USA can be a positive but making a profit remains the number one goal to driving the value of the business higher. Therefore, buyers will put more value on businesses with strong technologies that reduce labor and produce higher quality products at more competitive pricing. Also, adding new suppliers should lead to better pricing and greater certainty in the supply chain.
The time has come for business owners to review the status of the PPP loan programs and get the application started for loan forgiveness. Getting the books in order and optimizing the loan forgiveness will improve the Balance Sheet and make the business more valuable as a result.
Today, business owners have been reluctant to enter the market and evaluate the sale or merger of their business, unless the pandemic has had a severe negative impact on the business.
If you are in that position, the investors looking for distressed opportunities are everywhere. Finding a buyer for all or a portion of the business may give you the staying power to survive and rebuild value, or at least salvage what is left.
As always, the real opportunity exists for businesses that have continued to perform in these uncertain times. With so few business owners coming to market the demand for high quality businesses is high and the supply is low. That has always led to premium pricing!
• Eric Lundstrom, CPA, is president of Focus Capital Advisors, Inc., in Des Plaines. Contact him at email@example.com.