Keeping business exits on course

  • Exiting a business can be a challenging experience for business owners, even at the best of times.
  • While COVID-19 has changed many things in our lives, all the measures of a business valuation remain the same.
  • If you’re looking to sell, remember it’s how you react to crises that is important to buyers.

Exiting a business can be a challenging experience for business owners, even at the best of times. But for those wishing to leave their business in the next 12 months, the Covid-19 pandemic may feel like an additional hurdle.

“We’ve been working closely with our clients, some of whom are looking to grow their business ahead of exit and some who were ready to sell their business,” says Malcolm Murray, Managing Director of Entrepreneurs Hub. “In the first few months, most business owners were affected by Covid-19. Everyone was caught out, whether it was because of projects or orders going on hold, staff sickness, supply chain issues or moving to a working from home model.”

However, as the dust settles, he believes that few entrepreneurs should need to change their longer-term exit plans, in particular how they value their businesses. “For those looking to sell, nothing has actually changed,” he explains. “They still want to exit their business. The only thing that may have changed is their timeline.”

Henry Campbell-Jones, Managing Director, Hornblower Business Brokers agrees: “Many of the business owners we’ve been talking to have still been considering the sale of their business and feel quite positive about the future.”

Sector-specific challenges

While the pandemic has likely affected all sectors in some way or another, its impact hasn’t been negative for all.

“Some businesses that are looking to sell have continued to do well, especially service sector businesses and some engineering businesses whose customers are in the healthcare sector,” says Henry. “We’ve kept going with those sales and have had a reasonable level of enquiry for those.

“Others that have been affected have put the process on hold to address issues, such as furloughing staff or working remotely if that’s possible. They’re focused on getting through lockdown and coming out the other side.”

Malcolm adds that being ready to react as the pandemic develops will be key for some entrepreneurs: “Construction clients that were hit quite hard at first seem to be coming back quite strongly and are receiving a number of enquiries about new projects coming in. They’re building some momentum.”

Bouncing back

Malcolm says while Covid-19 has changed many things in our lives, all the measures of a valuation remain the same “There is no difference in valuing your businesses now than at any other time. No matter what anyone says, it is still on a return on investment basis. Buyers may look at a multiple of revenues or earnings before interest and tax or earnings before interest, tax and depreciation and amortisation.

“You still have to look at your profit, make your businesses as profitable as possible and make your profit consistent. Buyers will possibly be looking at the dip caused by this a little more sympathetically, but they’ll be keen to see how the company has responded and bounced back well.”

With this in mind, Andrew Lock, Co-Founder and Partner at LockDutton Corporate Finance says that for most businesses, the level of valuations should not change: “Good businesses going into Covid-19 are deemed by buyers to be good businesses coming out of it,” he says.

“Trade buyers, both in the UK, Europe and the US, are saying that if they see three to four months of trading back at the level a business was at pre-Covid-19, they are quite happy to make acquisitions based on 2019 performance. If you can get your run rate back up for three to four months then buyers are ready to acknowledge that.”

Henry agrees: “In presenting businesses to the market, we will still present their pre-pandemic performance as well as the future forecast. That sets the tone that we believe the business is going to recover and where we need to get to in terms of the valuation.

“However, for those businesses more affected by the lockdown, it may require a more structured deal where an amount is paid upfront and an amount is deferred or contingent on reaching previous performance.”

Building value

And if businesses have been set back by the pandemic, how can they rebuild their value to pre-crises levels? Malcolm says that the businesses that are doing this well are the ones that have shown the ability to innovate and adapt quickly.

“If you look at restaurants and pubs that have thought: “well, we can’t supply our usual service but we can do something else”. We’ve seen them quickly start offering takeaways and delivery services others supplying essential foods to local communities. They have been able to think creatively and it’s helped.

“Another thing businesses can do at the moment is drive sales and marketing. Many SMEs rely on word-of-mouth and repeat business. They don’t proactively market and sell their business. You can’t wait for things to come back; you’ve got to go out and win it back because if you don’t your competitors will be.”

If you’re looking to sell, remember that everyone is in the same boat at the moment and it’s how you react to the crises that is important to buyers.

Exit Strategies may include the referral to a service that is separate and distinct to those offered by St. James’s Place.

The opinions expressed by third parties are their own and are not necessarily shared by St. James’s Place Wealth Management.

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