COVID-19 AND SELLING YOUR BUSINESS
The onset of the COVID-19 pandemic and the ensuing uncertainty caused a pause in M&A activity across the globe. But as the crisis unfolds, there is reason for significant optimism.
As the scale of the coronavirus pandemic started to become clear in early 2020, panic set in across the globe, bringing M&A activity to a sudden pause. Both buyers and sellers waited to see how events would progress, and what business would look like on the “other side”. As buyers begin to return to the market (very strongly in some sectors), and confidence starts to grow, we can now see early signs of how the market will take shape both during and after the crisis.
BUSINESS VALUATION DURING COVID-19
The pandemic has not affected all businesses equally. While a few sectors have boomed (ecommerce for example), most businesses have been negatively affected to one degree or another. While known short term performance will have some impact on valuations, the factor which is currently having a greater impact is uncertainty.
If the value of any business is the sum of its future cash flows, then valuation fundamentally depends on predicting the future. The uncertainty created by the coronavirus pandemic has made this prediction even more difficult than before. But this does not mean that business valuations have plummetted, it just means that it is more difficult for both buyers and sellers to know what the right valuation is. Valuation professionals across the spectrum are using terms like “material uncertainty” in their disclaimers.
“This does not mean that valuations have plummetted, it just means that it is more difficult for both buyers and sellers to know what the right valuation is.”
In this environment, information is very valuable. The onus is on sellers, and their team, to highlight the parts of the future which are known, and which can be predicted, to build a more detailed picture and make valuation more achievable. For industries that are expected to be resilient through the crisis, a business case must be made that explains this in detail. At the level of the individual business there will be many things that can be predicted, and data should be used to highlight these. Specific measures taken by businesses to reduce losses, or to take advantage of growth opportunities in specific profit centres, must be quantified, tracked and highlighted. The objective is to reduce the generalised cloud that surrounds the future by making certain parts of it clearer and more predictable.
EBITDAC
The overly simplistic principle of just excluding the period affected by coronavirus, and employing the same metrics for valuation but using the time period immediately before the pandemic took hold (the so called EBITDAC approach), will not yield a meaningful valuation on its own. Each industry and each business is different, but in most cases people do not reasonably expect conditions to return to exactly as they were in 2019, and a simplified valuation with this approach is obviously flawed. Each business will have some elements that are more profitable than before, some that are less profitable, some business units that have completely changed or have been eliminated, and new profit centres that may not have existed before.
The principle of using this most recent data as a starting point for a valuation, however, is reasonable. But the devil is in the detail, and for business owners who do not want to see this valuation discounted based on generalised uncertainty, it is imperative that they reduce this uncertainty where they can.
Viewing conditions from a buyer’s point of view, but with the information available as the seller, is critical in bridging the gap between the two. Business owners are acutely aware of not only the threats, but the opportunities available in the business. Now more than ever these opportunities must be quantified and communicated to the buyer.
These will vary in both type and scale depending on the buyer being targeted, their existing business and their position in the market, so it is critical to highlight these opportunities differently to different buyers. Perhaps more importantly, threats must be quantified too. Where they can be measured, and reframed in the context of other positives, their impact is greatly reduced. Where it is difficult to measure or predict a given outcome (opportunity or threat), a framework should be used to make predictions from “worst” to “best” case, to be used as the basis for discussion.
Businesses that cannot reduce the uncertainty around their future at all will face valuations that are significantly discounted compared to pre-COVID levels, whereas those that can show at least a degree of predictability will be discounted far less.
Serious buyers are not cheap bargain hunters. They are looking for value, opportunity and the mitigation of downside risk. Many know that crises present opportunities to secure valuable assets at slightly reduced prices or better terms, by taking away some short term risk from the seller and benefiting from longer-term upside potential. They know that crises are often the only times when certain competitors ever become realistic acquisition targets. Professional investors and experienced acquirers are used to operating under conditions of uncertainty. Faced with incalculable variables, few buyers will act. But with sufficient information to build a business case for an acquisition that makes sense, serious buyers will proceed.
BOOMING BUSINESSES
The above discussion focuses on the majority of businesses that have been negatively affected, to one degree or another, by the coronavirus pandemic. But there are many businesses that are performing better during the pandemic than before. Ecommerce was mentioned above, but there are many other sectors from pharmacies to industrial cleaning that are busier now than ever. Consumer SAAS businesses in certain sectors, telehealth businesses and many others are growing faster than ever before.
Those who are looking to sell during this period will be able to capitalise on this boom, if they can demonstrate that it will continue. Like other businesses, this will involve extracting data where available, and building a business case that shows future cash flows being greater than past ones. Uncertainty is the enemy here too, and the more data that can be used to back up this case - even if it is only “around the edges” - the more likely it will be that a higher valuation will be achieved.
IN PRACTICE
The main principles of business valuation still apply. The question is how much of a discount from the pre-COVID valuation is reasonable for businesses that have been negatively affected, or how much of a premium can be justified for businesses that are performing better than ever. The key to each answer is building a reasonable business case, using those pieces of data or insights that are available, to reduce the uncertainty around the data that is not available.
If you would like to discuss the sale of your business or if you would like a free business valuation, just email us at info@hahnbeck.com or call 0203 624 6010. We would be happy to have a confidential discussion with you.