Valuing a business in the
post-COVID world

Remember how the residential housing market exploded during the pandemic?

There has also been a similar explosion in the level of demand seen in the world of mergers & acquisitions and general business sales during that time.

But are the prices companies are being sold at rising just like house prices did?

In this article, we’ll sum up our experience of taking companies to market and selling them in the coronavirus era.

The true financial position of buyers

Many companies, family offices, venture capital firms, and private equity firms enjoyed a fantastic pandemic – particularly those in the technology, warehousing, distribution, online retail, and healthcare sectors.

While they may have had to deploy extra cash early on during COVID-19 to scale up to meet new-found customer demand, that cash was more than offset by much improved cash flows and healthy profit margins.

Most will have a wall of cash behind them and their leadership team will be under pressure from shareholders and investors to spend that money on consolidating their market position. Many will eye taking over competitors as a way to shore up the advantages they’ve benefited from because they happened to be in the right sector.

Other companies did not have a great pandemic – commercial real estate, financial services providers, bricks and mortar retailers, fitness and leisure businesses, childcare businesses, and, of course, the hospitality sector.

Their leadership teams will be under pressure to preserve cash and, right now, M&A is just not on their radar of priorities.

However, some of them will be backed by large companies and investment funds who still believe in their business models and who want to establish a permanent advantage over their competitors during these usual times.

The biggest takeaway from this – there will be slightly fewer companies looking for takeover targets but, for the vast majority, it’s business as usual and you can see this with the deals we’ve conducted for our clients.

But have buyers’ tactics changed?

As mentioned earlier, technology, warehousing, distribution, online retail, and healthcare companies have benefited greatly from many more sales and much higher profitability in the last 18 months.

But it is highly likely that they will initially approach valuing your business from a pre-COVID 19 position arguing that the uplift in turnover was as a result of a once-in-a-century period of social and economic upheaval and that the value added was temporary.

For buyers interested in purchasing companies occupying sectors which have struggled, their initial offers for your company will likely be pitched low.

They will argue that the pandemic hurried what was likely to be a structural decline in the size and the importance of the industry you trade in and buying your company makes sense because they want a larger part of a smaller market to take advantage of economies of scale. That’s one of the reasons there has been major consolidation in the newsprint sector for the last ten years.

How should you and the business brokers, accountants, and solicitors represent you react to these approaches?

Arriving at “true” value

We need to focus on the true value (realised and unrealised) within your business and we need to take an evidence-based approach to the various justifications buyers provide for their low-ball offers.

For companies in sectors which have benefited from COVID-19, where is the evidence that there will be a slowdown in demand for your products and services post-pandemic? How significant will the slowdown be – 2%, 5%, or 10% – and on what do they base those assumptions?

For companies in sectors which have suffered from COVID-19, an 18-month period of lockdown and isolation, although awful, does not represent the seismic permanent change in human behaviour suffered by the newsprint industry mentioned earlier. The internet, that sector’s great disruptor, is here to stay – lockdowns, viral passports, and self-isolation aren’t.

We’ll strongly argue that the growth in your sector prior to the pandemic is more accurate and indicative of future trends and that the return of turnover and profitability to levels seen in the 12 months to March 2020 will be quick. There is plenty of evidence from other recessions that this is the case.

However your company was affected by the pandemic does not affect its underlying viability, profitability, and potential. You have created a base from which a well-funded company or investment firm could create something even bigger.

That’s because selling a business is not about what it’s worth now or even what it was worth in February 2020.

Selling a business is about a buyer paying a premium for the work you’ve put in and receiving a discount for the value that they’ll add to it under their ownership. In other words, you receive more than the value of the business as it is today and the buyer pays less than the future value of your business in 3 years’ or 5 years’ time once they have grown your company and rationalised costs.

And the best way to do that is to filter out the tyrekickers and the Micky-takers right from the start so that you’re left with a number of serious, well-funded buyers who can see the true value in your business now and in the future.

What is your business actually worth?

Remember that there’s never an ideal time to sell your business. No matter how much you tweak every aspect of your business seeking improvements, businesses do not sell themselves.

Just like any sale, you need to understand the value of what you’re offering to prospective buyers and sometimes see beyond that many years into the future.

For an informal, confidential conversation on what you could sell your business for and the type of company or investor most likely to want to buy it, please call us on 0800 634 9679.