Monday, August 17, 2020

Is it Still a Good Time to Sell? Depends on Industry

 The first half of 2020 has started with unforeseen events that may have changed the course of your company and your ability to sell it.

Prudent business owners try to plan for nearly every scenario so they can better manage cash flow, staffing levels, production levels, banking relationships, etc. Consumer preferences change and so do market conditions, but I can assure you, no one foresaw a mandated government shutdown. It was a doomsday scenario for some businesses and yet a non-event for others. The good news is that recent events likely haven’t stripped your company from its value, even if you were one of those who were deeply impacted. That’s because (at least for now) business brokers can explain away the second quarter as an “Act of God.” Merger and acquisition expert Alan Austin explains: “When buyers evaluate which businesses to purchase, they always look at historical performance as an indicator of the health of the business and expected future earnings. Sometimes, businesses have catastrophic events that can be damaging in the short term but can quickly bounce back from them. After all, this is why business interruption insurance exists. The disaster could be because of a fire, hurricane, or other Acts of God; such as an unforeseen pandemic. As M&A advisors, we’re making the argument that this “public health crisis” is one of those temporary setbacks that have little effect on long term earnings ability of most businesses.” But what if a temporary interruption becomes not too temporary? Like the 3rd, 4th quarter, and into 2021? “That’s when things get more complicated,” says Austin. “The longer things go, the more difficult it is to make the argument that it’s temporary. Doubt creeps in buyer’s minds and they start to think that this is perhaps the new normal. Therefore, past business performance is no longer as relevant as it once was. Across all industries, I believe you’ll clearly see some winners and some losers in the coming months.” So, is it a good time to sell your business, while so much uncertainty exists? “It depends,” Austin says. At the time of this writing, restaurants are not yet allowed to be at full capacity, cruise lines are not operating, airlines are on a reduced schedule due to demand and are operating at reduced capacity, and hotels are scrambling due to canceled business travel, summer vacations, and events. “Anything travel related is tough. That’s not to say that you can’t sell your business now if you are in the travel industry, it just means that you may not get the sale price you may have in the 4th quarter of 2019. There just aren’t as many buyers out there with the appetite for the risk this industry now has. Even if you do find a buyer, they will be asking for a deep discount.” “However, there is nothing fundamentally wrong with our economy and once the government feels comfortable easing restrictions, I expect we will not only return to previous levels of economic activity but possibly to even stronger levels due to the pent-up demand.” Some industries have been well-positioned and have prospered. People are spending more time at home and are investing in their living spaces. The home services category, which includes landscaping, remodeling, roofing, construction, retail garden centers, and other residential service-related businesses are doing quite well. Furthering the boom is the unexpected free government money. “If you own one of these businesses, it’s really a great time to sell because we can show an upward trend of revenue and profit that gets buyers excited,” Austin adds. What other categories are hot right now? Austin likes healthcare services, technology, and anything construction related, among others. Cost of Money While the Payment Protection Program (PPP) and Economic Injury Disaster Loan (EIDL)are acronyms most business owners have learned about in recent months, there are other lesser-known Small Business Administration (SBA) loan programs that are designed to keep merger and sales activity high. Until September 27th, the SBA will pay the first 6 months of principal and interest on all new 7(a), 504, and Microloans. “That’s a good deal,” Austin assures. Combined with historically low-interest rates, it makes perhaps the lowest cost of money we will see in our lifetimes. It means that buyers can acquire a new business, go through the inevitable learning curve, and not have the looming monthly debt service over their heads for half a year. It removes much of the friction of a business sale, so transactions can continue to happen. The recommendation Austin gives any company owner is: “Know what your business is worth.” It’s sound advice anytime, but especially in this environment. Keeping your eye on your value can help you weigh decisions about your exit. Talking to a qualified business broker like Austin is a good first step. We can show you what comparable businesses have sold for in your area and what we can be learned from those transactions.

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