COVID19 has clearly thrown a wrench into the plans of business owners that were preparing to sell their business, or has it?
Businesses that were forced to shut down during the Stay Home or Shelter in Place orders may find it necessary to either postpone the sale or reduce the price of your business based on the current market conditions. However, businesses that have been able to continue to operate such as essential service providers will be in high demand during and after the pandemic is over. Likewise, businesses that are able to recover quickly after being forced to shutdown or slowdown during the pandemic will also be in demand as our economy recovers.
Business sales/transactions have plummeted during the pandemic because many sellers have pulled their businesses from the market or decided to wait until the pandemic passes to put their business on the market. Likewise, many buyers are now on the sidelines waiting for this to pass and businesses to be broadly open again before they are comfortable with the economic climate and the general health and safety risks associated with the pandemic . With that being said, Pacific Business Sales has had several offers on businesses we represent and several transactions in escrow during the pandemic. These are businesses that have been able to continue operating because they are essential services or e-commerce businesses.
Of course the larger question is what will happen once the Stay at Home orders are lifted and businesses are open again?
Business Values after COVID-19
Businesses are valued based on cash flow, more specifically Discretionary Earnings (DE) and a multiple is applied to the DE. Valuation multiples are based on the size of the business and it’s industry, these multiples do not change much over time or with the economy. For example the multiples in previous economic down turns remained relatively the same, including during 2008. Business values do drop as a result of an economic downturn due to a drop in Discretionary Earnings.
What will determine the value of your business after the pandemic is over is the DE the business is generating at that time. Post COVID-19 valuations can take into account the economic impact of the pandemic by normalizing the company’s revenue and earnings during that period. Below we discuss how businesses will be valued going forward and how revenue and earnings will be adjusted to account for the impact of COVID-19.
SBA Financing and Valuations
We have spoken with our top SBA lenders about the impact of COVID-19 on business valuations and financing for the purchase of a business. The lenders understand that many businesses will see a significant drop in sales during the pandemic and stay at home orders. Underwriting guidelines will be modified to account for this event and to normalize the company’s revenue and earnings.
The approach bank underwriters and business appraisers (valuation analysts) will be using is as follows. Revenue and earnings during the pandemic and until the Stay at Home Order is lifted will be removed and replaced with average sales and earnings figures from the previous year or perhaps a 3 year average. This will normalize the revenue and earnings to remove this catastrophic event from the revenue, earnings and valuation.
If your business was not affected by the Stay at Home orders and COVID-19 then preparing your business for sale will follow the normal steps. If your business was shut down or had a substantial slowdown there will be additional action to take. We have outlined the Post COVID-19 steps to prepare your business for sale below.
Preparing to Sell Your Business after COVID-19 Pandemic & Stay at Home Orders
If your business is distressed because of COVID-19 and the Stay at Home orders it can still be sold. Distressed businesses sell at very steep discounts, often for the value of the assets, but they can be sold even during this time.
Information Required for a Distress Sale