Selling your business in times of crisis
By ATB Financial 20 April 2020 13 min read
Preparing your business for a sale, and all of the nuanced strategies and decisions that come with it can be daunting at the best of times, let alone during a global crisis. Still there’s room for optimism during times of uncertainty. After all, with adversity there is also opportunity. In order to get the most out of that opportunity, your response to this crisis and your ability to focus inward on your business during this time of waiting to transact, can play a key role in increasing the potential selling price post-crisis.
During this crisis it will most likely take longer than you had anticipated to complete a transaction. All things considered, any attempts at determining a fair price to transact nearly impossible. The risk priced into the market means even a strong seller would be transacting at a low multiple in this environment.
The good news is private equity is waiting to be deployed and is at an all time high even in this downturn. Bain and Company estimates there is $2.5 trillion in private equity world wide waiting to be deployed with over half of that available for North America. Post-crisis, they will be actively looking for companies with a strong growth story and a robust management team in place. Unfortunately they will also be on the look for companies they can purchase for a small fraction of their pre-crisis valuation. It is important that you successfully manage your company through the crisis to minimize the risk of being forced to transact at low multiples, or even worse face the inability to transact.
Successfully managing your company through this crisis involves three key steps: Prioritize, Stabilize and Strategize. Let’s walk through each step of the process.
Step 1: Prioritize
There are an abundance of actions a business needs to consider at the time of a crisis. While overnight your operating model can be turned upside down there are two key areas that should take priority to ensure viability post crisis: managing your cash flow and supporting your employees.
We have all heard the saying “Cash is King” and now more than ever managing your cash flow needs to be your top priority. If you don’t already have a detailed cash flow management system, you need to prioritize putting those processes in place. Start with a detailed review of your working capital including estimating the timing of your inflows and outflows, while factoring in the following:
- Be conservative in your accounts receivable assumptions. Assume your receivables are going to take a lot longer to collect. Your customers are managing their cash flow and most likely will take longer to pay. Stay close to your customers to try to increase the accuracy of your forecasted collection timelines.
- Manage your accounts payables. There may be opportunities to stretch your payables without impacting your business. Be careful not to damage relationships with key suppliers, ultimately if supply shortages happen they are more likely to prioritize your shipments if you are continuing to pay regularly.
- Talk to your financial advisor early and regularly. Understand the capacity of your credit facilities and their willingness to defer payments. Financial advisors and partners are much more likely to work with customers that communicate open and honestly with them than those that avoid their calls.
- Understand the government programs that are available to you and apply as soon as possible. Seek help from an advisor if you aren’t sure if you qualify before assuming that cash is available to you.
- Make the tough decisions early and quickly. No business owner wants to lay off staff but if it is the only way to protect the long term viability of your business, do it as quickly as possible to preserve cash.
- Make cash flow management a daily practice. You should be checking your bank account first thing in the morning and updating your projections with the latest available information.
Be honest and communicate frequently with employees about what is happening in the business, and where possible link it back to the local and national economy. That doesn’t mean you pretend you aren’t afraid, be honest about your fears yet leave them with the confidence that you are moving forward and managing the situation.
When tough decisions need to be made, as much as feasible engage employees in the solution. You might find employees are willing to come forward and offer solutions like a pay cut, work reduced hours, retire early etc. if it means protecting the long term viability of the company. During these times employees are dealing with a lot of stress both at work and at home, take the time to watch out for your employees and offer them as much flexibility and support as possible. Your leadership and reaction to the situation can create an opportunity to come out of the crisis with a united, highly engaged workforce. The loyalty and trust fostered will go a long way in improving the long term value of your business.
In the face of this COVID-19 pandemic, ensuring the safety of your employees needs to be paramount. For many this has meant allowing employees to work from home when feasible. For those needing to interact with customers, it means implementing protection standards to make your employees feel and be safe. Second, as employees could get sick or need to care for loved ones, parts of your workforce may be unavailable for weeks. If you don't already have cross training in place for all roles, it needs to be a top priority before things get worse. The last thing you want to realize is that a critical task for your business was completed by an employee that is currently not feeling well with no one in place to cover in their absence.
Step 2: Stabilize
Once you have put processes in place to address the prioritized items in Step 1, you can shift to other areas that will help your company adapt and continue day-to-day operations during the crisis. A key theme throughout all these areas is fostering your key relationships and ensuring proper and frequent communication with all stakeholders.
Revenue boosting opportunities
Ensure you are communicating regularly with your customers and understanding how their demands for your products and services are going to shift during the crisis. If you closely listen to their needs and find solutions to support them during this crisis, you will help to deepen key relationships for the long-term.
If you are in the situation where you can no longer serve you customers as the result of the crisis, it is important that you find a way to remain connected with them during this time so they will continue to be your client post-crisis. For example many fitness centres and trainers are offering sessions online.
Necessity is the mother of invention. If you are not finding a way to build your client relationships today, your competitors may, and that client might not return post-crisis. This is an area where it might mean getting really creative in how you can remain connected.
Typically in a crisis or downturn, it is important to focus on what you truly bring to the market as a business and do it really well. Now is not the time to invest in launching a big new business or products as new offerings take time to break even and even longer to become profitable. In this environment you may not have the cash flow to support these new undertakings.
The exception to this rule is with minor innovation to your existing offering. In such cases, you can leverage a low cost modification to your core business to increase revenue in the crisis environment. Some examples of this we have seen include moving to online sales and starting local delivery of products during the pandemic. We have also seen companies use their capabilities to support massive supply shortages to produce critical health care products. Examples of such innovation will position you as being agile and truly connected to the needs of your market and wider community, making your business more intriguing to potential suitors.
When your company emerges from the crisis and looks to enter a transaction, potential purchasers are going to be measuring your business on its ability to outperform its competitors. Potential purchasers will look at your sales efforts and the extent that you have deepened your relationships with customers throughout the crisis. They know the loyalty and goodwill generated by those actions will go a long way to protecting the future value of the company.
Secure supply chain
It is important to understand your inventory situation and be proactive in securing what is essential to continue operations. To do this you must stay in close contact with your suppliers. Clearly understand their situation including how the crisis has impacted them and if they can continue to meet your demand. Be proactive in finding alternative sources for key materials in the event an unanticipated disruption to your supply chain occurs. As mentioned in Step 1, manage cash closely so you have the ability to pay quickly if necessary to support the cash flow of your supplier.
Unfortunately fraudsters see the downturn as an opportunity to take advantage of the situation and have been quite successful. With the increased reliance on working from home and e-commerce, it may introduce vulnerabilities in your IT security. The first and most cost effective way to prevent an attack is to educate your employees so they can detect phishing attempts. If you don’t have experts, this is an area where you may want to invest in support to ensure the integrity of your IT system. The long term cost of an attack can cripple a company, so an ounce of prevention can really be worth a pound of cure when it comes to IT security.
Step 3: Strategize
In the previous two steps you have worked to normalize operating in the crisis situation. It is time to re-evaluating your strategic plan and how you can take advantage of the opportunities created by the crisis. Many business owners are finding the downturn is creating more space in their day and are leveraging this opportunity to perform strategic tasks that often are sidelined by more pressing day-to-day operations.
Succession planning and opportunistic hiring
Investors want to know there is a strong management team so if you decide to fully exit the business, the business will continue to thrive. Spend some time building a succession plan and evaluating your internal capabilities to lead the business. If there are skill gaps, build a development plan to train your successor in those areas. If the right person doesn’t exist internally or you find you are missing some key senior level roles, a downturn can be a great time to find strategic hires, when it is financially feasible.
Another potential area to look at expanding is your sales force if the revenue opportunities in the market support it. This is an investment if done correctly can provide a return on your investment that results in an increase in value.
Tuck in acquisition
If you have access to capital a small acquisition can be a quick way to increase the selling price of your business. A ‘tuck in” acquisition is a small acquisition that you can complete with very little disruption to your business. Ideally you can create synergies quickly by removing duplicate head office type functions or real estate. Given the low valuations and the need for capital by many organizations, the opportunity might exist to purchase an attractively priced business and gain critical resources that support your succession planning. Typically a tuck in acquisition is purchased at a multiple lower than the anticipated multiple from the sale of your business. Combined with the synergies achieved this can be a quick boost to your proceeds of sale. For example:
|Tuck In Acquisition||$1 million||4x||$4 million|
|Tuck In Post Integration (synergies realized)||$1.2 million||5x||$6 million|
Net result in this example is a $2 million lift to your valuation. The impact could be even more significant if a key competitor is removed from the market or a key role needed for your succession plan is included in the transaction.
Process improvement & efficiency programs
When times are good it is easy for companies to inadvertently become inefficient in their operations. The focus on meeting the high demand sometimes comes at the expense of questioning if it is the best or most efficient way to produce. Many companies that have proven in the past to come out of a downturn successfully have doubled down on finding ways to operate in a more efficient manner. We have seen this in Alberta in the oil and gas industry, when the price of oil declined in 2015, companies were forced to look at more efficient operating models to even survive in the future.
Consider doing a lean review of your processes which ensures you are putting the most energy towards creating value for the customer and fostering an environment of continuous improvement. Start by mapping out your processes and look at your processes through the lens of your customer and what they would be willing to pay for. Through this process, you may reduce or eliminate complexity and costs that add little value. For example, your customer might be willing to pay for a superior material to use in their product but not the back office functions that go into procuring that product. In addition, with the continued emergence of artificial intelligence and the relatively low costs of bot technology, now might be the time to automate some back office or routine type processes.
Capitalizing on market disruption
Chances are good we won’t exit this crisis the same way we entered it. Also likely, is the fact that the crisis will change the very nature of how we approach business. Activities we never thought we could do remotely, we now realize is possible. For example, we have come to appreciate the convenience of having more items delivered to our house and we may not go back to traditional shopping. Your business should spend some time brainstorming how this crisis has changed your customer shopping preferences, whether their values have changed and how you might be able to capitalize on this market disruption.
Tax planning - estate freeze
An estate freeze refers to a transaction whereby the existing shareholder or shareholders of a company “freeze” the value of their ownership with any future growth of the company accruing to a new shareholder. If you are in the situation where you want to pass more of the future growth to a future generation, this is the opportunity to take advantage of the low valuations and perform an estate freeze. You might also be in the situation where a freeze was created at a higher value than the current valuation of the shares, making the original freeze ineffective. A re-freezing of assets would allow you to achieve the desired objectives of an estate freeze at more contemporary valuations.
Value acceleration is a process that not only works to increase the value of your business but improve the liquidity of your business. It ensures your business in the best position to maximize the value of the business while being personally prepared to maximize the net proceeds. It also ensures you have a plan for what you are going to do next in your life. For example, 75% of business owners profoundly regret selling their business after the first year according to the Exit Planning Institute. Such an analysis involves closely evaluating your business and your personal situation for your preparedness to exit your business. It starts with putting action plans in place to de-risk and improve the business and ensure your personal financial planning is in order.
Consider engaging a business transition advisor
At ATB, we recognize the business transition planning process is complex and can be challenging for our clients to manage while successfully running their business especially in a downturn. For tailored advice on transition planning, business valuation, effective exit strategies, value acceleration or long-term financial preparation for a business transaction, contact Amanda Vella, Business Advisory and Transition Consultant with ATB Wealth.
Business Transition Guide