The COVID-19 pandemic, which has roiled markets and continues to shake the global economy, has also completely changed the business exit or sale trajectories for many entrepreneurs.
For some, like restaurant, gym or travel property owners, exit prospects have all but evaporated amid stringent lockdowns and social-distancing rules. After all, there are few buyers lining up to acquire a business which has seen its revenue shrink in half or more, and whose growth prospects are uncertain at best and nonexistent at worst.
Many business owners in these hard-hit sectors will have to wait until the market returns to some semblance of normalcy before they’re able to demonstrate any sort of stable performance to an external investor. Unfortunately, for some, the only exit could be bankruptcy: the Canadian Federation of Independent Business predicts the pandemic could permanently shutter more than 200,000 businesses, throwing millions of people out of work.
For others, however, COVID-19 related issues haven’t impacted revenue and the pandemic could actually be helping their business grow. For example, some technology firms, healthcare services providers and specialized retailers catering to the crisis-driven boom in online shopping would fall into this category. There are also businesses deemed to be essential that may not have seen any meaningful impact, one way or another.
These businesses and their owners are continuing to attract the eye of investors looking for stability, resilience and opportunity amid the pandemic. And with record levels of private equity dry-powder capital still sitting on the sidelines, the first half of 2021 promises to be a true seller’s market for businesses that demonstrate these characteristics.
It’s important to note that current market conditions do not appear to have changed investors’ discipline when it comes to evaluating companies for potential purchase. While exceptional businesses continue to get significant attention and attract compelling valuations and debt financing options, that same level of interest doesn’t extend to businesses with a less appealing growth trajectory, overly concentrated revenue or immature systems and processes.
This could evolve if PE dry-powder levels continue to build over the next 12 months, but it’s not happening yet. While the private equity world appears to be willing to look past some challenges of a business, perhaps in a trade-off for exciting growth potential, the debt markets are more cautious. Without debt market support, a “rising tide for all boats” in terms of valuations is less likely.
So, against this backdrop, how do owners looking to exit or transition their business ensure that they position it as attractively as possible? And how do those currently waiting for conditions to normalize chart a path to future growth?
Few things get investors and owners more excited about the future than consistent execution and stable financial performance. Owners should be focused on delivering a couple of decent quarters of results that show a recovery from the depths of the pandemic (to the extent there was a fall-off), along with some positive momentum. In addition, as much as possible, those contemplating a sale will also want to be able to demonstrate that their revenue base is resilient and diversified.
Investors want to buy businesses with a clear trajectory for future growth, so owners considering an exit must have a clear plan for the company to reach the next level. What that looks like depends on both the industry and the individual business in question. Does the business have adjacent markets which it could enter with relatively little difficulty? Are there product innovation opportunities that look compelling? Does the company need to build a top-tier business development team? Now is the time to pursue and underscore these aspects.
Businesses that stand apart from the rest of their peers can reap a premium in terms of valuation but also in terms of market positioning and their ability to attract customers (there are many e-commerce companies, but only one Shopify!). If competitors are struggling, articulating why you’re not struggling is very powerful. This exercise can also help better define market fit and future growth opportunities – which is never a bad idea.
As sudden, taxing and difficult as the pandemic has been, it has not fundamentally changed what it means and takes to be a high-quality business. Entrepreneurs who realize this and position their companies accordingly stand to benefit significantly, regardless of whether they are seeking an exit or plan to stay in the business for the long haul.