How Corona virus affects business sale

How the COVID-19 could impact the sale of your business

Uncertainty is the death knell to business transactions and to business sales in particular.

At the start of 2020, the topic of Coronavirus was often a subject in business sale discussions. At the time it carried the same weight as other more standard business risks. All of that changed substantially as soon as it was clear that we were going into lockdown.

And, as a result of the extreme uncertainty, mainly due to reduced or zero customer demand or the reduced capability to deliver commercially, business sales are now taking a back seat to other priorities.

So, when will ‘normal service’ resume? (and isn’t that the million-dollar question?)

Short Term Priorities – Survival

We are in the eye of the storm right at this very moment.

It’s a remarkable, somewhat unbelievable, moment in time where we are all being impacted in some way. Change is being forced on the entire population, and circumstances are changing from day-to-day. It’s difficult, if not impossible, to determine the timelines that will apply. There are no previous similar experiences that we can draw on and there is a lack of quality information to be able to make informed decisions upon. 

Understandably, most of us are currently focussed on our own personal health and our immediate financial survival. In my opinion, we are fortunate that our Government is responding so quickly and decisively with a focus on getting cash to individuals and into the economy. You could argue there may be alternative strategies to do this and that more will be needed. However, we are already seeing that the Government’s strategies are evolving and are being implemented in much shorter time frames than what we have previously experienced.

At a business level, I describe the current state as a financial and economic triage. Some businesses are fortunate enough to be in a largely unaffected industry in that they operate either completely virtually (e.g. Internet Providers) or they are in the ‘essential’ category (e.g. food or health-related businesses). Even essential service businesses do, of course, have to overcome problems. These focus mainly on operational issues and on service delivery. However, those problems are typically trivial compared to some other businesses, where the focus has to be on short-term business continuity.

Back to Basics

Business owners and professional advisors I am talking to suggest that owners are currently paying attention to areas such as wage subsidies, rental relief, introducing new business-wide procedures and technologies such as getting their workforce working remotely, customer orders and credit procedures, supply chain issues and securing working capital funding. These are the very basics of business continuity.

Fortunately, it seems that we in New Zealand are taking a pro-active response across the board. It will be interesting to see how events play out over the next four to eight weeks. I think that we are only just getting started with the type of support that both individuals, as well as businesses, will need over the coming months and possibly years.

Longer-Term: Future Business Models

Once business owners overcome the immediate short-term survival challenges, (I estimate 1 to 3 months), I expect that they will be able to shift their focus towards what the longer-term business model will look like for their respective businesses.

This is critical because underlying business models are intrinsically linked to the value of a business; how much someone will pay for a business or whether they would do a deal in the first place.

Well prepared businesses

Some businesses I am dealing with are already more ‘modern’ with their business model, i.e. they already have some flexibility with things like overheads, staff resourcing and the like and have adapted better to the use of technology.

For these businesses, going forward may be “business as usual” e.g. if they are an essential service. Alternatively, they are, in effect, in hibernation until customer demand resumes once the lockdown requirements lift. In other words, they are well placed. They just need to ride this out and ensure that they maintain the capability to be able to deliver when things get back online.

Distressed Businesses

Other businesses may be in a more dire situation. Some will be able to restructure their way to a sustainable future, others will not survive – either choosing to voluntarily shut down as the best or only viable option. For some that choice will be taken away from them.

These businesses will be faced with incredibly tough choices. They will either need to fundamentally change their business model or unfortunately, there will be no business for them to sell in the future.

Changes in customer and employee behaviour

Aside from the basics of business continuity, it will be interesting to see how consumer demand and employee behaviour will change as a result of the COVID-19 enforced ‘experience’. And, therefore, how this will influence business models.

With such an extreme event, it is interesting to see the changes that are being made in our society. These include working from home, the use of technology, integration of video as the first point of contact (e.g. interesting in the medical and education sectors), flexible working hours, family support structures and generational changes. These changes are just some that I can see as leading to positive transformation within our businesses.

It will also be interesting to see how many of these enforced changes will remain when we get back to ‘normal’, especially in situations where the expectations and preferences of customers and employees effectively demand that the changes become permanent. Many of the historical excuses constraining or prohibiting these changes will have evaporated, e.g. working from home has had to be implemented with real urgency in most businesses. In some cases, the genie will be out of the proverbial bottle. In others, it will just make good business sense.

Implications for Business Sales

Clearly, there is a lot of uncertainty in the current market where everyone is re-evaluating their own situation. In the short term, this will mean that there will be limited business sales transactions, possibly excluding distressed business sales.

Therefore, once businesses successfully exit survival mode, I expect discussions to shift more toward the sales strategy side, i.e how and when to sell as opposed to an immediate business sale.

Some of the key questions I expect to be discussing with business owners include:

  • Have there have been changes to the sustainable earning of the business (excluding understandable one-off implications of the lockdown period)?
  • What’s happened to the risk profile of the business?
  • Has the COVID-19 event shown strengths in the business model or exposed additional risks?
  • How do business owners now view the quality of customers and suppliers and the business terms agreed with them?
  • How will perceptions of risk change in the market in general? E.g. ability to get funding?
  • How individuals view having their own business vs. working for someone else?
  • How the profile of potential purchasers for your business has changed – who will be in a position to do a deal and who won’t be?
  • Is an alternative structure for a business sale needed?

These questions will also have implications for the owners personally:

What does this mean for the original or preferred timeline for sale?

Will the value or timeline expectations of the owner need to change?

If any of these questions are difficult to answer positively then it will be very difficult to achieve a sale, let alone at a great price.

In short, there will be no going back to what things were like before COVID-19. The question will be what good business models look like going forward.

The business owner that can answer that question will have a business that is well-positioned for a successful sale in the future.