The coronavirus pandemic has hit all businesses in a sudden and dramatic way, interrupting plans for the foreseeable future. What was arguably the best M&A market ever for sellers of closely held companies has taken a dramatic pause, forcing business owners who were considering a sale of their business to re-think their options. Conversely, owners previously looking to buy a company who balked at the high prices and substantial competition may find increasingly attractive opportunities.
While selling your company or buying a business might not be top of mind given the recent disruption, a window of opportunity has opened to reduce the risk inherent in a family business, take advantage of attractive acquisitions or even to sell your business. Let’s look at each of these in turn.
One way to reduce risk in a family business is to bring in a minority business partner. Dollars from a private equity firm, structured capital provider or private family office could be used to expand your products or services, buy a complementary business or allow shareholders to de-risk by taking some chips off the table and put the money in the bank.
Each of these potential partners are proven minority capital providers whose dollars could help cash-strapped owners who are unable or unwilling to invest the amount of capital necessary to accomplish their strategic plan. And the product and operating expertise of these minority investors might offer a competitive edge in today’s challenging economic environment, and be a relatively better fit if selling a majority share is not the clear answer.
Buy a company
As economic uncertainty rises, buyers become better positioned as the number of ready sellers may increase and prices for businesses decline. Current market stressors lead to this process of price discovery that widens the differential between the price at which a person is willing to sell and the price the buyer is willing to pay.
Unless we get a V-shaped recovery, the price discovery process will likely lead to price moderation. The number of business sellers may also increase as owners look to avoid the risk or lack of clarity inherent in a prolonged downturn.
This past month we have seen heightened interest in owners contemplating acquisition as an attractive strategic option. For example, we have a client in the vacation rental management business that expects to see significant disruption in the industry. This could lead to attractive businesses wanting or needing to sell, and we are working with the leadership team to position the rental management business as an acquirer.
Sell the business
There are many reasons why a business owner may now decide to fully divest or sell a majority position: to avoid the economic repercussions of COVID-19, to create liquidity for family wealth, health reasons or because the business is financially unable to continue.
Selling a business has been made exponentially more complicated as buyers and their lenders struggle to get their arms around the depth and breadth of the current business challenges. Still, buyers are absolutely on the lookout for new opportunities. In January, Fortune estimated private equity firms had $1.5 trillion in dry powder available to buy companies, a figure that ignores dollars that strategic buyers and family offices are eager to invest.
Sellers facing a price discovery gap may be enticed by the increased use of structuring tools such as earn-outs, which give sellers more cash upside if certain results are exceeded, or seller-notes, which provide buyers with debt financing for a portion of the acquisition.
The coronavirus pandemic has brought with it both difficult decisions and compelling opportunities for all businesses. As you encounter the new realities of daily business life, remember that there are still thousands of private equity firms, capital providers, investors and strategics eager to invest in middle-market businesses. Although the thought process of buyers and sellers may be different than just a short while ago, M&A continues to be a vibrant arena for your business to enter.