COVID-19 should create new considerations for exit planning

In early 2020, mergers and acquisitions (M&A) and valuations were at an all-time high. Then, the entire industry came to a sudden, yet temporary halt, due to COVID-19. Business owners have collected themselves and the industry will jump-start again with new factors at play.

Owners who are now considering selling may be concerned about how COVID will affect their company’s valuation, their ability to sell and what they need to consider to protect their own interests. These hesitations are valid; much has changed in this short period.

Today, valuations are still healthy in certain industries, many just as healthy as before, but there is a higher level of scrutiny in the due diligence process to get to the same level of valuation as pre-COVID times.

There are a number of factors business owners should take into account when considering M&A and exit planning. Let’s consider what hasn’t changed during 2020. Buyers are still looking for companies that have solid financial statements and a strong financial position. They are looking for companies that have invested in their people and developed a strong management team that isn’t overly reliant on the founder. In addition, they are looking for businesses with safe, reliable systems in place.

So, what has changed? Buyers will be examining how a business has addressed supply chains, sales channels, personnel issues and protecting margins in the COVID environment to ensure it is equipped to ride out the current pandemic and be in a strong position for future situations.

One of the best things a company can do is underscore the agility of its management team. In this new environment, the ability to quickly pivot and work through unforeseen challenges is key.

In addition, there are new considerations for which industries and companies are considered non-essential versus essential. Companies in industries considered non-essential may have to work harder to show resilience and the ability to protect gross margins.

Overall, business owners need to be prepared for extensive due diligence as they prepare to sell their company. The value of the business will be tied heavily to the predictability of cash flow now and in the future.

In addition to setting up their business to achieve a high valuation and appeal to potential buyers, owners need to consider their own exit planning strategy, as the selling process includes numerous legal, financial and tax implications. The goal here is to ensure the owner ends up financially and emotionally ready to leave when the time comes.

Some key considerations for exit planning include:

• Establish exit objectives. If the owner hopes to start another business, or is aiming for an easy retirement, knowing these goals can help leverage opportunities to reduce taxes while improving cash flow.
• Identify exit options. Work with an exit adviser to assess the best time to sell considering the current environment and the implications of the existing tax situations.
• Preserve your values and your business. It’s important to profit from an exit, but if an owner wants to protect the business legacy, they need to get a great advisor team in place. An M&A advisor can help an owner ensure that the buyer preserves company culture and values by selecting the right buyer and putting the right terms in the sale contract.

Editor’s note: Ryan Holder, CPA, is a managing director of Strategic M&A Advisors, LLC and has been involved in sell-side M&A advisory, valuation, business advisory and capital formation for more than 20 years. The opinions expressed are those of the author.