How COVID-19 May Affect
Your Exit Planning
Owners of manufacturing companies who are planning an exit must consider a range of factors during the current unprecedented challenges. While some are delaying an exit altogether, others are anticipating last-minute term changes from buyers. Here are a couple of potential scenarios.
Considering an Exit
Business owners considering an exit must reassess their plans, and weigh whether the crisis will increase or decrease access to qualified buyers. Many PE firms have announced their plan to ramp up investing during the crisis, but it’s because they hope to find devalued companies. You may need more time to negotiate your exit, and you may find significant differences of opinion when it comes to valuation.
We are seeing strategic buyers in plastics and metals manufacturing willing to value companies based on Post-COVID financials because they need capacity and they need it now.
Negotiating a Sale
Stay-at-home orders have stalled many sales, and slowed the negotiation process to a crawl. No one knows what to expect. When will the virus end? When it does, will people’s consumption habits fundamentally change? Will suppliers survive? Who will be left?
Buyers are going to use the pandemic to drive down prices and get a good deal. When deals are in progress, buyers and sellers may debate whether the business is worth the original agreed-to price. This will vary from industry to industry. In some niches, company values may actually increase thanks to the loss of competition or an increase in demand for certain technologies. Even in areas where stay at home owners are no longer in place, businesses have had to make difficult decisions about whether to reopen, how to safely do so, and whether to open at full capacity. No matter where a business comes down on these issues, there is political blowback—whether from very cautious customers or from those who refuse to take any precautions at all. All of this can affect brand, the course of normal business, and the ability to continue increasing revenues.
Sellers must consider whether buyers are still able to make strong offers. The demand for seller financing will increase. Many buyers will low ball companies because they hope that sellers are eager to sell and leave the stress of business ownership behind. Desperation is the seller’s worst enemy here. If you can’t get the price you want now and you have reason to believe the business will bounce back, waiting for the dust to settle may be the most viable option.
However, this may be the time to get the best price you are going to see for some time. The bottom line is if you are even thinking about selling you need to get help understanding how buyers in today’s market are valuing your company.
People currently receiving buyouts may find that COVID affects their stream of income. There may be layoffs, salary deductions, and other strategies to reduce payroll. Companies may then look to former owners to further slash expenses, including by requesting lower or delayed payments. There may be more disputes over earnouts, especially since meeting earnout benchmarks is extremely unlikely during an economic crisis.
No matter what your exit plan is, having the right advisory team can help you make good decisions. There may be options you’re not aware of. Moreover, identifying certain weaknesses early in the process can help you better position your business for a lucrative sale. So work with an M&A expert to get the most from your exit, regardless of where you are in the planning process.
About NuVescor Mergers & Acquisitions
At NuVescor, we align the interests of investors and business owners to enable the personal and financial goals of our clients. For over a decade, we have helped founders and owners of companies in the manufacturing sectors achieve maximum value for their companies. Together, we can provide business valuations, financial analysis, investment guidance, and business transaction advice for middle-market companies with revenues from $5 million to $500 million.