Buying and Selling During a Pandemic. Now what?

May 14, 2020

The current pandemic, subsequent shut down of our economy, and the expected downturn that may follow have created more uncertainty than the previous recession in 2009 or the system shock after 9/11. For business owners that were hoping to transition out of their business this year or in the near future, or buyers that were actively searching for an opportunity, these factors are sowing confusion, uncertainty and pull back from buy and sell activity.

But there some possible silver linings in the clouds:

1. Banks are in a much stronger position than 2009 and the Fed is providing ample liquidity to support stimulus efforts and lending.
2. Interest rates are at a historic low, the cost of capital has never been cheaper.
3. The stock market, while displaying volatility, has avoided a catastrophic crash and may even represent buying opportunities in some sectors.
4. When businesses reopen it will create a slew of economic activity as they restock shelves, order materials for production and re-hire staff.
5. Unemployment numbers may be discouraging, but the bulk of those numbers represent workers who have been told not to work, not workers who have lost their job. Real job losses will increase when businesses choose not to re-open, but right now unemployment is a temporary and artificial benchmark.
6. Easing of employment pressures. While the economy was enjoying 10 years of continuous growth, the struggles of employers to find employees to fuel growth was significant. Business owners may find it easier to find employees as some businesses do not open; workers use the economic shift to change jobs or careers, or businesses use less labor through changes in their business models.
7. Destructive capitalism. After the crash of 2009, we saw the failure of undercapitalized businesses, businesses with too much debt or businesses that did not have solid business models, products, or viable locations. Businesses able to navigate through this crisis will be stronger, more resilient and have a smaller competitive landscape.

With every crisis comes opportunities, but also significant risks. Strong businesses may experience a slowing of sales or profitability, but that will be temporary over the next 3-12 months. We do not expect to see deep discounts in business values. Failing businesses will fold or sell for the value of their assets, but strong businesses will not need or want to sell for a discounted price. On the buy side, there are always individuals, businesses and investors that have the financial resources to make acquisitions for a fair price.

So, if you are thinking of buying or selling there is still opportunity but may require a more nuanced analysis to determine value and risk:

• Temporary versus projected effects. Many businesses with pipelines of work have not yet felt the effects of the pandemic or shut down. For businesses that seem to be holding steady, how much was from orders booked prior to the shutdown and how long will those orders take to fulfill? What does the current sales activity look like and what does the short term, 3-6 month, projections look like?
• Federal stimulus. Did the business receive funds through the EIDL or PPP programs? Were those used to subsidize normal expenses or replace the loss of revenue? If there were government funds, how do those impact the financial statements.
• Sensitivity to shocks. Some businesses are going to be relatively unaffected by the pandemic but may be affected if there is a follow up recession. What type of business is it? What is their risk exposure to specific types of economic shocks?
• Liquidity. Does the business or buyer have access to lines of credit, financing or working capital to handle a prolonged downturn? Many businesses failed during the last recession not because of sales losses, but due to the loss of short-term credit to weather the storm.

Buyers and sellers may want to have a reality check before engaging in the process:

Buyers. If you are looking at an acquisition during a pandemic or downturn, you will need to accept the uncertainties and volatility of an unknown economic environment.

Sellers. Even if your business is tracking well despite the pandemic there could be more economic downside in the future. You may be utterly confident in your businesses’ ability to survive or even thrive during a prolonged downturn, but an outside buyer may not have your insights or experience. Buyers may be hesitant, but that is to be expected.

Ultimately, the ability to close a deal will rely on a compromise: the same as always, pandemic or not.