The COVID-19 pandemic has disrupted most phases of life across the globe, including the selling and buying of businesses. Unfortunately, a significant number of small businesses won’t or already have not survived COVID-19 despite the efforts of the federal, state, and local governments to keep them afloat. While many businesses are unaffected or have even benefited from the COVID-19 business environment, despite governmental assistance, other businesses are operating at a true economic loss or negative cash flow, thereby requiring such owners to utilize savings or credit to keep the business running. Regardless of the scenario, there are always businesses for sale and, in this environment of COVID-19, business owners looking to sell are presented with unique challenges.
For those already adversely impacted, should they sell now or hold on if it’s economically feasible to wait out the pandemic’s impact? If your business has been struggling since the pandemic and you don’t have a strong desire to continue running it, you may be better off selling it at its current valuation (or get a real valuation performed) rather than putting more money into it. If you drain too much of your personal assets trying to save the business, it will be hard to move on with the next phase of your life. For those prospering, should you hold onto your business and enjoy the incremental cash flow or get out while things are trending positively? Deciding to sell a business is an important decision that can impact the seller’s life dramatically; positively or negatively.
Fortunately, serious buyers exist even during the pandemic. With the cost of money so low right now due to the level of current interest rates and some investors shying away from other investment opportunities such as the stock market, available capital is in abundance and ready to be utilized to purchase businesses. Additionally, unemployment leads to more business buyer interest as people look to replace the jobs they’ve lost.
Accordingly, sellers should not panic, but should prepare to sell their businesses. Sellers need to clean up the books to give the true picture to potential buyers. They and the bank that finances the deal, if bank financing is needed, will want to know exactly where the profits come from and identify risk factors. When a seller takes the time to identify and fix the books and risk factors, if such can be fixed, the business may be more appealing to a buyer, which could result in a higher sales price and quicker sale.
For those owners who want to cash out of their business for whatever reason (e.g., unstable or negative cash flow, retirement, change in focus, moving out of state or territory, illness, etc…), many often are concerned they won’t be able to attract what they perceive is fair value upon the sale of their business. Many entrepreneurs have unrealistic expectations of what their business is worth. Some sellers have a number in their head; a dollar figure they truly believe they must or should in all fairness receive in order to part with their business. That dollar figure is sometimes based on the amount invested by the seller (whether that investment was made 2 years or 20 years ago), which is most likely not indicative at all of what a buyer would or should pay. Other sellers take a back-of-the-envelope approach in determining how much money they will need to sell their business – based on a multiple of sales revenue or cash flow numbers (likely pre-pandemic numbers) which also likely isn’t indicative of what a buyer is willing to pay to own the business.
A seller cannot sell their business if the price isn’t reasonable in the eyes of any potential buyers. Time is often wasted by sellers who attempt to sell their business at an unreasonable price. Conversely, a seller may underestimate the value of their business and leave hundreds of thousands of dollars on the table. In this scenario, the business will likely sell fast, and the seller will be unaware they are receiving far less for their business than they should. If you’re an owner who desires to sell or if you’re looking to purchase a business, getting a good understanding of the value of the subject business is a critically important step. Just because a buyer sees a business listed for $500,000.00 doesn’t mean it’s worth that amount. It could be worth only $100,000.00, for example. Similarly, a seller could truly believe their business is worth $500,000.00 when it’s really worth $800,000.00, resulting in a bargain for the buyer and financial catastrophe for the seller. A fair sales price in the eyes of both an informed seller and informed buyer needs to be determined as it is when making the sale of any product or service. However, as each particular business offered for sale has its own unique business story and set of circumstances, determining the sales price of a business is a much more difficult task than determining the price of a home, for instance.
Practical thinking will help avoid financial disaster for both the business buyer and business seller. If you are buying a business, a cleaning company that disinfects commercial buildings or a business that delivers groceries may be a great choice right now, but what about afterwards? When looking at a business to buy, you want to identify those that were doing well right up to the time of the pandemic and those that can, with all things being equal, do well after this situation has passed. Preparation is key for all parties. Buyers are not unlike sellers, in that they are looking to be put in a position to exploit the opportunities that will and have surfaced due to the pandemic. The patient and prepared business seller or buyer will be the successful business seller or buyer.
For most sellers and buyers, the sale and purchase of a business is one of the biggest, if not the biggest, transaction they’ll ever enter into. Accordingly, buyers looking to make a safe and viable purchase will compare different businesses’ sales prices, cash flows and operations. While conducting due diligence of the subject business, serious buyers will utilize the various databases available to assist them in determining how much they should pay for a business. Buyers will also try and understand the various financial documents and contracts the seller has provided the buyer to review. Most buyers will try to decipher the database, financial, and legal information, but will not succeed in accurately determining a businesses’ fair value. Many hidden liabilities exist, which can reduce the value of the business, which the seller may or may not be aware of and which the buyer may not discover. Other buyers will rely on professionals such as their business lawyer and/or CPA to help analyze the target business. This can get pricey as most often a buyer will analyze multiple businesses during their search for the business they deem the right fit.
Due diligence, including a proper valuation of a business, has always been necessary, whether pre or during COVID-19, to establish a viable sales price for the business and for the buyer to determine whether or not they should purchase the business at or near such a sales price. A valuation of a seller’s business should take into account the financial, legal, human resource, and operational information of the last several years leading up to the pandemic, the potential impact of the pandemic, insight into the numbers generated during the pandemic, and an analysis of the business and the industry in which the business operates going forward as we eventually emerge from the pandemic. Clearly, we don’t know long the pandemic will last, what it will look like after, who will disappear, and who will thrive. However, the opportunities are present for both sellers and buyers of businesses who are prepared and armed with critical information and insight.
From the author, David Rummell, Esq.