Selling your business amid COVID-19

Many business owners will have been contemplating the sale of their business in 2020 and then along came COVID-19 and shattered their hopes and dreams. Or did it? Well, there’s no disputing that the lockdown measures have had a significant impact on the mergers and acquisitions market, but how serious is it for SME businesses who are thinking of selling their business? And what can you do now to prepare to sell your business post COVID-19?

We are seeing three types of deals at the moment:

  1. Legacy deals: These were pretty much agreed in principle before COVID-19 kicked in. Both the buyers and sellers still wish to conclude these deals without delay.
  2. Delayed deals: whereby business owners are guarding their relatively stable businesses and waiting patiently for the effects of the government restrictions to be lifted to establish their new ‘normal’ before taking their businesses to market, perhaps later this year.
  3. Abandoned deals: involving businesses that have been seriously damaged by COVID-19. They first need to concentrate on surviving, before pivoting their business models and demonstrating this works ahead of taking their restructured business to market.

Yes, COVID-19 is having an impact on selling a business. But on a positive note, not all businesses are struggling, but for those that are, when we eventually return to some form of normality many business owners may still want to sell their businesses at the earliest opportunity. As for buyers, funding may be more difficult for some, but plenty will still be active.

So, what three key actions can business owners who have ‘delayed deals’ carry out now in readiness for a future sale?

1. Continue to maintain excellent management information

It will be crucial to demonstrate to prospective buyers the underlying strength of the business before, during and after COVID-19. Reliable monthly management accounts will demonstrate this, but also spend some time adding commentary so you’ll be able to easily recall the events and explain the actions you took.

2. Forecast the future

If a seller is confident of the future of their business, then it’s very much in their interest to invest the time to quantify this to prospective buyers using financial forecasts. This means monthly integrated profit and loss accounts, cash flows and balance sheets, with detailed written assumptions to support the numbers. In the current climate it’s recommended to run two or three scenarios to show you’re being prudent. Don’t expect the best price if you don’t do this.

3. Start preparing for due diligence now

It’s a pretty monotonous task but rest assured, if you’re going to sell your business, you’ll need to do it at some point. Better to get your house in order now rather than wait for the sale process itself when you’ll be weighed down with a million and one tasks.

Business owners with ‘abandoned deals’ will need to adjust their business models before considering a sale. Having said that, if a sale is the intended end game, then it’s important to understand how your new business model will be valued in the future. The likelihood is that it will be valued on a multiple of profits, but what that multiple will be depends on a number of factors and will differ from sector to sector. In general terms, the greater the risk the lower the multiple. For instance, a property business would derive a higher multiple on its recurring lettings income as opposed to its one-off agency work. So, knowledge of these future valuation factors should help drive your decision making now.

Our Corporate Finance team are experienced in advising SME business owners on preparing their business for sale. If you’d like to explore any of the above in further detail, then please get in touch with our team on 01903 234094.

A version of this blog originally appeared on the website of MHA member firm, MHA Larking Gowen.