Blog | May 12, 2020

Selling a Business in an Economic Downturn, To Buy or Sell – This is the Question


by Trevor Hood
Original post:

Selling your business in an economic downturn and trying to achieve the highest price available would appear to be an unfortunate dilemma for any business owner. If you were contemplating a sale prior to these turbulent economic times brought on by the COVID-19 pandemic consider the following…

In the context of mergers and acquisitions
Economic downturns often result in the tightening of corporate coffers resulting in an overall reduction in acquisitive activity. Selling in the midst of a storm would generally be unwise.

In light of the current borrowing environment, with the cost of debt continuing to hover at relatively all-time low levels which has lasted for the better part of over a decade, and stimulus offered by Central Banks resulting in continued low costs of borrowing, it may be the perfect time for investors with the appetite for risk to buy. The lower your cost of capital, the easier to bolster returns on borrowed funds.

It is worth noting that a decrease in public company price-earnings ratios tends to produce a corresponding “trickle-down” effect for the multiples paid for private companies – the higher the risk, the lower the multiple that is going to be paid. In the long-term, we expect that public panic will retreat, pent-up demand for goods and services will come on-line, and in conjunction with central bank stimulus injections will culminate in an appreciation of financial assets. The perfect time to sell may be just around the corner. While purchasers will recognize the impact of the pandemic when assessing historical results, just how the business was able to weather the storm will be a major consideration for them.

Listed below are some measures for you to focus on the marketability of your company that could help maximize value in this current environment:

Understand the drivers of value for your business
Business value drivers are critical factors that will factor heavily in a potential purchaser’s valuation assessment. Identifying and understanding those drivers will allow you to ‘de-risk’ the company thus enhancing value.

Get your ‘House In Order’
Obtain a buyer’s due diligence listing and prepare for each item noted. While a focus on survival is essential, using excess capacity within your staff to work on those little things that you never have time for (i.e. policies and procedures documentation, standard employment contracts, etc.) will provide long term benefits. Along with this preparation, ensure your financial statements are clear of personal and non-business items and look to obtain basic tax planning and implement any changes that are required.

Lock-in key customers
How you work with your customers during this crisis will go a long way in establishing and building those relationships for the long-term. In working with them, look also for opportunities to create longer-term contractual arrangements or improved payment terms that are mutually beneficial.

Make yourself redundant
Probably the largest risk factor in the sale of private companies is their dependence on the owner of that business. Taking steps to expand customer relationships amongst your team, documenting, and sharing the technical know-how of what you do on a daily basis, and positioning the business so that it can operate without you is critical.

Demonstrate that you have a viable business interruption plan

Take steps such as:

  1. Establish a Business Interruption Emergency Team – To spearhead the project from cradle to grave.
  2. Identify essential functions, services, staffing – That are integral to a business’s ability to deal with a crisis.
  3. Prepare a plan for each of the essential areas identified along with a process to triage these issues and work through them on an effective basis.
  4. Test the plan ensuring it addresses and mitigates all identified risks.

The value of any business depends on its capacity to generate cash flows, the expected growth in these cash flows, and the actual or perceived uncertainty associated with these future cash flows. Eliminate risks associated with your business and any uncertainty associated with cash flows that are under your control.

Even in times such as these, business owners can still maximize the price received in a transaction regardless of the existing economic environment, boom, or bust.

By Trevor Hood, CPA, CA, CBV, CFF
Financial Professional
SB Partners LLP
3600 Billings Court, Suite 301, Burlington, ON , L7N 3N6
Tel: 905-633-6353
Fax: 905-632-9068


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