The COVID-19 pandemic hugely impacted companies in nearly every business sector. The impact forced business owners like you to confront a wide variety of unforeseen challenges. The massive shift to remote work, changing labor market, and new trends in consumer behavior are just a few of the obstacles you might be navigating in 2021 and beyond. If you were thinking about selling your business before the pandemic, you likely put those plans on hold.
The health crisis created unprecedented economic uncertainty that kept most would-be sellers from closing deals. However, deal volume is up compared to 2020. Additionally, the net percent of owners who have raised selling prices is the highest it’s been in decades at 36%.
So, is now a good time to sell your business? The numbers paint a relatively clear picture. But they perhaps can’t show the whole picture.
Assessing the environment before selling your business
As you determine whether you’re ready to sell your business, it can be helpful to think about the potential acquisition from an investor’s perspective. The health crisis continues to remain top of mind for many people. Prospective buyers will likely place less weight on your performance during the pandemic than you might think.
The effects of COVID-19 have been both positive and negative on margins. This variation is due to a multitude of factors, such as demand, supply chain disruptions, health concerns, and more. Companies in sectors producing essential products — like consumer goods and life sciences, for example — accounted for the 11% of firms that reported positive effects from the pandemic. But carmakers, event managers, hospitality companies, and industrial products firms generally reported the opposite.
While the current environment might represent the beginning of the new standard, many businesses still feel the pandemic’s impact. The labor market, for instance, is still in flux. Understaffed companies may be unable to take on additional work. As a result, just because margins might remain high or low now doesn’t mean they’ll stay that way. In fact, more companies might experience margin decreases due to higher labor costs and ongoing supply constraints, among other factors.
Evaluating the pandemic’s impact on your business
The majority of factors that affected (or continue to affect) your business as a result of the health crisis are likely out of your control. Savvy investors will understand this. They’ll be more interested in how you responded to lockdowns and mandatory quarantines. After all, your agility during COVID-19 is a better indicator of your company’s long-term viability than the revenue you generated.
If your business is one of the many that faced workforce disruption over the past year, investors will want to know whether your employees have returned. Beyond that, they’ll want to know whether your employees are working in the office, remotely, or in a hybrid environment. Likewise, they’ll have questions about demand. Are customers ordering in normal quantities? Are you getting new inquiries from existing customers? Do you see inquiries coming in from potential new customers?
Just a year after American consumers spent nearly $10 trillion on services, the pandemic put the brakes on demand. As a result, people began saving instead of spending. According to Deloitte, the personal savings rate in 2020 was double what it was in 2019. But as consumer spending increases as more individuals receive vaccinations, investors want to see your company capitalize on new opportunities.
How to sell your company the right way
Even if you didn’t necessarily want to sell your business before the onset of COVID-19, you might feel that the current environment presents opportunities that are simply too good to pass up. On the other hand, you might also be understandably exhausted from the work of running a business during a pandemic. If so, you’re likely ready to pass on that responsibility to a new team.
Whatever your reasons for selling your company, it’s a hard choice to make. There’s no guarantee you’ll get the outcome you’re looking for. However, by preparing ahead of time and understanding what buyers are looking for, you can improve your chances of getting the most value for your company — and perhaps avoid seller’s remorse in the future. The following checklist will help you in that endeavor.
Maximizing your business’s value during a sale: a checklist
For owners, it’s not always clear what to consider when selling a business. This checklist will help you address aspects that investors will likely evaluate and inquire about during the purchasing process.
Every company is unique, but below, you’ll find action items that you can and should address before selling your company. You’ll also find additional context and considerations that may be relevant to you, depending on the nature of your business.
1. Objectively evaluate the strength of each line of business and each business function.
Your business could be highly focused on providing one product or service. Or it might bring in revenue from a multitude of diverse service lines. In the first case, you might consider the possibility of expanding your product line as a way to drive growth. It’s fine if you don’t fully initiate this effort before meeting with prospective buyers. However, knowing several potential expansion opportunities are available could work in your favor when it’s time to make a deal.
But if your business is highly fragmented, you might want to explore opportunities for consolidation or rationalization before selling your business. Product or service lines that don’t have much potential for long-term growth won’t carry much weight with investors. Nor will offerings with little to show in the way of profitability. Don’t just evaluate each line of business in a vacuum. Consider how each one impacts your selling proposition in the context of larger market trends.
In addition to examining your core revenue-generating functions, you’ll need to evaluate your company’s current leadership. For a business to sell at a premium price (or perhaps even at all), buyers need to feel that the management team is both complete and competent. If prospective investors believe that the management team needs to be augmented or that certain individuals need to be replaced, you might still be able to make a deal. However, your company’s valuation may take a hit.
Investors will look at your sales and finance departments. For example, let’s say you’re missing a dedicated controller or chief financial officer. Investors will ask questions about how your company handles finances. You must be prepared to answer these questions in detail. Once you’ve gathered information on all business functions, include it in a comprehensive presentation package. Investors can dive into the package during negotiations.
2. Assess customer concentration and customer trends.
Typically, investors will view a company with more customers as a less risky acquisition than one with fewer customers. That’s not to say more customers equates to more profitability. The revenue of a company with one or two lucrative government contracts, for instance, would be more impressive than a similar company with dozens of commercial clients. However, all contracts eventually end. Investors want to know that your company is equipped to identify, attract, and keep new customers when the need arises.
So, what if your company does attribute a sizable proportion of revenue to one or two clients? Here’s a useful rule of thumb to be aware of: If more than 30% of your revenue comes from one customer, investors will see “caution flags.”
This situation isn’t all that unusual in certain sectors. High customer concentration may not be a dealbreaker if your selling proposition is otherwise strong. Just keep in mind that some investors may walk away if that number is greater than 30%. Those that don’t will spend a significant amount of time vetting your primary customer. That process isn’t ideal for you or for them. Simply put, low customer concentration increases your chance of a favorable deal when selling your business.
3. Examine potential long-term effects of COVID-19.
As previously mentioned, the pandemic might have impacted your business in a number of ways. The crisis resulted in roughly 200,000 more permanent business closures in 2020 than historical annual averages. The fact that your company is still in operation is at least some proof of your resilience. However, buyers care more about the future than about the past.
How your company fared at the height of the pandemic simply isn’t a reliable indicator of future performance. After all, the circumstances presented by COVID-19 were an outlier for most businesses. That said, if you’re still dealing with lingering effects when selling your business, you should analyze them. Try predicting how long they’ll persist. Also, try projecting what they mean for the long-term outlook of your company. By taking these analysis and forecasting steps, you can better approach conversations about the pandemic’s effects on your business with potential buyers.
4. Identify your business’s growth levers.
Investors are looking for a return on what they invest in. Targets and time frames might vary considerably from one buyer to the next. However, all acquisitions are made with an eye toward growth. With this in mind, providing concrete evidence of recent growth is often your best shot at maximizing your company’s valuation.
Investors will always want to understand the potential growth levers that could lead to improved performance in the future. They’ll evaluate how costly these levers are to pursue, the risks associated with pursuing them, and the reasons you haven’t already pursued them. When comparing your business with other candidates for acquisition, the results of this investigation will usually play a deciding role.
The best time to consider selling your business is typically on the heels of strong, consistent growth. So, be aware of market trends or other factors that make the pursuit of new growth levers easier. Watching the trends can help balance the negative impact of COVID-19 on your business’s recent performance.
Just keep in mind that recent growth, even over the past three years, is good but will still be evaluated. Can you point to what you or the company did in order to achieve that growth? If not, it might be viewed as though you were the beneficiary of an improving market. If you can point to specific actions or changes made, investors will view the growth more favorably.
5. Decide on a suitable asking price.
Most buyers value businesses based on a multiple of cash flow, and companies sell for a wide range of multiples. That said, the value a seller places on their company is typically much higher than the value given by a prospective buyer. If you have a higher valuation, it’s important to back up your chosen asking price with concrete reasons.
To ensure that your valuation isn’t too high or too low, you will find it helpful to consult an appraiser. A solid appraisal will leave you with a detailed explanation of the factors behind your valuation. This lends additional credibility to your asking price.
Keep in mind that prospective buyers regularly engage business owners to establish relationships that could prove beneficial in the future. Whether you are selling your business for reasons related to upcoming retirement, exhaustion, or something else, don’t waste your time heeding the demands of an investor who isn’t serious about making an acquisition. Similarly, if you expect prospective buyers to be fair and transparent in their negotiations, be serious about your desire to sell and candid about your reasoning.
Prioritize partners over price
It’s likely that the acquisition process will be long, intense, and frustrating. It’s not easy to find the right buyer, and executing a sale could take months or even years. While you might be primarily concerned with achieving an optimal valuation, don’t discount the value of a good partner. You’ll want to prioritize partners over price, especially if you hope to remain involved in your company’s long-term direction after selling your business.
Ultimately, the most important factor to consider when selling is what you want to get out of the business. If you plan to be involved for years to come, choosing a buyer you’d like to work with might be more beneficial to you than choosing a buyer with a high offer. But if you’re ready to move on to the next stage of your life and don’t plan to look backward, then the price could (or should) be the most important factor.