View the original article in the Triangle Business Journal by clicking here.
Since pandemics are new for most of us, there aren’t a lot of data points or roadmaps that provide insights for business owners who want to, or have to, sell their business in the next couple of years. Those considering, or forced to consider, an exit generally fall into three categories:
Companies that will not survive Covid-induced economic dislocations, which are far from over, that are losing value on a daily basis. Companies that have a business model that is resilient to the current economic difficulties, or even thrive in the disrupted world we now live in, that are highly marketable today. Businesses whose owners wanted to seek a liquidity event in the next few years, can survive but not prosper in an extended downturn, but are unwilling to accept a price that reflects the “new normal.”
The unprecedented government actions being taken by the Federal Reserve and Congress to flood the market with cash, including the Paycheck Protection Program, have given business owners a false sense of security. Having been head of corporate finance and M&A policy for the U.S. Treasury during the 1991 downturn, and run my M&A advisory firm during the 2001 tech implosion and the 2008 market meltdown, there is one consistent pattern I have witnessed in the past that will inevitably be common among business owners who will not make it through this crisis – denial.
Entrepreneurs are an eternally optimistic bunch, which is why we were willing to take the risks that led to our success. But the flip side is that we often ignore the handwriting on the wall. Every business owner needs to objectively paint a picture of how the world is changing and how the pandemic has been a catalyst to expedite that change. Don’t just consider the obvious forces produced by the pandemic such as changes to shopping, dining, travel and event activities. Consider the new state of global politics, especially the friction with China; the high probability for radical tax and regulatory changes under a new president; the potential for massive cuts to government budgets at all levels; and unprecedented disruptions to the workforce caused by students abandoning online classes and dropping out of universities and millions of workers who now prefer to work from home.
Many business models can adapt or even thrive in this new world order. And companies that have staying power through an extended downturn are highly desirable. Large corporations need to diversify revenue streams quickly, which creates a bias for acquisitions over organic growth. Additionally, private equity firms survive by putting money to work, not sitting on the sidelines. They hold trillions in “dry powder” looking for a home. And since the landscape of acceptable industries and business models has contracted considerably, now is actually a good time for companies that can benefit from the current disruption to seek liquidity.
This club is not just biopharma businesses working on a Covid-19 vaccine and Zoom. There are countless business models that are more needed today than ever, such as a provider of benchmarking cost data to universities, sanitation products and services, real estate in more rural locations and smaller markets, home security, warehousing and delivery services, etc.
Business owners whose cash would have run out except for their PPP loan may well be the walking dead. Each day that they put off an inevitable sale increases the likelihood they will not be sell-worthy. And business owners who are not going to thrive in a new world order who are waiting for the world to get back to “normal” when they can get the price they could have sold for a year ago are going to find that 2019 price may never reappear. And by waiting they will face capital gains tax rates twice what they are today and will have a lot less to live on after a sale.
So for many business owners, now is a good time to sell. For many others, the longer you wait the worse your prospects look. In either case, being a deer in the headlights is not a good strategy, even though that is the natural instinct when our inclination is to simply hunker down and get through difficult times.