How Could Corona Affect The Sale of Small Businesses?
A Guest Blog Post By
Neal Isaacs, CBI, MBA,
Are you selling your small business? This post is meant to help you focus as a small business owner on what it means to survive the Coronavirus.
At the time of the writing of this article, we are on the precipice of something unprecedented. The Corona Virus and COVID-19 have paralyzed the US emotionally and economically. It goes without saying that from a humanitarian perspective this event is devastating as people are sick and dying, but I’m a business broker, not a medical professional. This content is only meant to focus on what it means for small businesses and the owners who depend on them.
Most small business owners are just trying to put together a plan for their businesses to survive what happens when the government imposes mandatory closures and the lack of “business as usual.” But some owners are looking farther into the future. Some were positioning for an exit and some just had offers fall off the table. Let’s explore what this abrupt stagnation could mean for business owners when reviewing this time from the future.
One Time Adjustments:
The important thing to recognize is that we’re all in this together. Every owner and prospective buyer knows that this is a monumental, once-in-a-lifetime economic event. Most buyers have pressed pause on acquisitions for now, and there is uncertainty when it will end at this time, but it’s well documented that it started affecting businesses in March of 2020.
When recasting financials for 2020, most buyers would consider normalizing 2020 by replacing March and similar “Corona infected” months with documented trends from unaffected months. In other words, an argument could be made that a business that normally produces $100K of revenue each month from January to December, which did $25K in March-June of 2020, should be valued as a business that does $1.2M in a year that didn’t experience a pandemic.
While the banks may not consider this financial treatment, a pragmatic buyer could.
A must-watch guide on self-isolation during the Conronavirus pandemic.
Abnormal Expenses:
One thing that’s happening for event businesses and many other scheduled service businesses are cancellations. In these scenarios, business owners are experiencing the double whammy of not only losing the business but paying the credit card processing fees twice; once for the booking and again for the return. A data set could be prepared to show what typical credit card fees are and highlight those merchant charges that were unnecessarily attributed to the pandemic’s activity. Credit goes to Jeff Snell of Enlign Business Brokers for this insight…
A pragmatic buyer would understand that he or she wouldn’t experience these escalated merchant charges in a normal year.
The general rule of recasting is asking if the next owner of the business would experience similar revenues and expenses if they stepped into the owner’s shoes in the normal course of business. Because we’re living through the opposite of a normal course of business, so undoubtedly there may be other adjustments in trying to reconcile the effects of the pandemic.
Another example could be the Cost Of Goods Sold for utilized food or similar perishable products purchased going into the week(s) when all businesses shut down.
The list could go on and on, within reason...
Pivot opportunities
When considering adjustments, however, it goes both ways. Some entrepreneurs will pivot their businesses and make money from the response to this event. Medical distributors, for example, could add ventilators and masks to their pipeline and make a lot of money from this episode.
Savvy buyers will dig into the numbers and discern what revenues are COVID-19 specific and which couldn’t be replicated in the long term. Lack of customer and product concentration are hallmarks of transferable businesses, and owners should move into new markets to fill the gaps but also be mindful of the proportion of the business they are depending on as they grow.
Long Term Outlook
Years from now, we should be able to look back on this time and view it from a long-term perspective. As painful as it is now, the Corona pandemic episode can become another aberration on the trend curve, no different than previous events like SARS and Swine flu. Long-term trends matter and time give perspective. If business owners can pull their businesses through this tough period as we make history, they can re-write it for business buyers in the future to illustrate what could have been without Coronavirus, and at the same time reap the benefits of the rebound.
More about Neal Isaacs
Neil helps entrepreneurs acquire & sell their businesses through his firm VR Business Brokers of the Triangle and writes about the business owner’s journey on his blog at www.RaleighBusinessBroker.com
Neal Isaacs, MBA, CBI is a Business Broker
Certified Business Intermediary who serves business owners in the North Carolina Triangle market with exit planning, business acquisition & sale.