COVID-19 M&A: Buying a Business in Uncertain Times

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The market doesn’t like uncertainty. Certain buyers are retreating into wait and see mode, waiting to see how long the lockdowns will stay in place, how supply-demand issues will shake out, and whether we’ll hit a full-blown recession.

But opportunities happen when others retreat. That’s why the coronavirus pandemic could be the best opportunity we’ve seen to buy a business in the last five years.

Warren Buffett talks a lot about capitalizing on fear and short-term struggles. He says, "The best thing that happens to us is when a great company gets into temporary trouble...We want to buy them when they're on the operating table."

Yes, there is no doubt that certain businesses will unfortunately fail in the months ahead. Many businesses will struggle. But some businesses will thrive. Others will meet these challenges with great innovation. And some will simply make it out the other side, bruised but not broken. 

Uncertainty is just that – uncertain. The outcomes can tip either way. Your challenge is to manage risk while still capitalizing on the upside. With that in mind, here’s why you might want to grow through acquisition in a pandemic:  

Regain some leverage. The M&A market has been a seller’s market for years now, at least for businesses valued over $500,000. The bigger the business, the heavier the competition from buyers. So while sellers haven’t been calling all the shots, valuations and deal terms have definitely skewed in their favor.

Now, buyers will find they have more leverage in negotiations. We’ll have sellers anxious to exit their businesses rather than weather another recession. They may offer more concessions to get out now, agreeing to lower multiples, more seller financing, and more of the purchase price tied to earnouts.  

Widen your talent pool. Finding qualified employees has been a huge issue for businesses these past couple of years. Many businesses couldn’t grow simply for lack of talent. But with more than 17 million Americans filing for unemployment, it’s certain that not everyone will go back to their old job.

Some won’t have a job to return to. But we’ll also see people using this as a time to reconsider their work-life situations. You may find many top-notch people willing to discuss new roles and opportunities.

Renegotiate. You may also find that landlords and suppliers are willing to renegotiate contracts as they look to retain business in the months ahead. If the business you’re purchasing has been plagued by cost increases, this may be an opportunity to reset to a more economical position.

Borrow cheaper. Buyers who act now will take advantage of inexpensive financing. Lower interest rates mean you can keep more of the profit you earn. That means more money to invest in business growth or more money to pay a seller. You may be able to afford a larger acquisition than you could have considered before.

What’s more, the CARES Act includes an SBA debt relief program that includes new SBA 7(a) loans of up to $5 million for the purchase of an existing business. If you’re approved and secure your loan before September 27, 2020, your first six months payments will be covered. (If current interpretations are correct, that’s six months of debt relief, not debt deferment.)

Update and innovate. When times are good, some business owners get complacent. They stop innovating, or marketing, or managing working capital. Their businesses support a comfortable way of life, so they stop growing.

Now, many of these businesses will struggle. They’ll need a fresh perspective and new ways to flourish. They’ll need YOU. Whether you’re an individual buyer or a business looking to grow through acquisition, find the businesses that need your signature strengths and use that to your advantage.

Many successful small businesses will be successful again. A good business that meets a customer need will weather the downturns. And in the end, the winners will be the people who got on and rode the tough times through to recovery.

By Scott Bushkie

Scott Bushkie is Managing Partner and Founder of Cornerstone Business Services and DealCoach.

With more than 20 years in the M&A industry, Scott is a recognized leader in the field, providing exit strategies, business valuations, and M&A advisory services to business owners in the lower middle market. He has successfully executed sales to domestic and international buyers, private equity firms, family offices, and strategic buyers. Get an Estimate of Value Today. Follow DealCoach on Linkedin

 

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