21 October 2020
Many business sales that were in motion in early 2020 dropped off at various stages of the business sale cycle. The uncertainty of COVID-19 caused many potential buyers and investors to reconsider their immediate priorities and step away from deals that were as good as done.
Over the last couple of months, we have started to see a strong resurgence in business and share sales across many sectors, including previously aborted transactions. Prospective trade buyers and investors have taken the time to bunker down, reassess markets and trends and many are now on the lookout for acquisition opportunities. COVID-19 has obviously impacted businesses in different ways, but those that have adapted to the changing conditions and have put in place measures to protect the value of their business are the ones that are most likely to be attractive targets for a prospective buyer.
In this article, we set out five tips for reviving a business sale that was previously aborted.
1. Detailed forecasts
Understandably, buyers and investors have become increasingly wary of how well target businesses are mitigating the current and future impacts of COVID-19. In particular, buyers are looking for businesses that have taken active steps to consider and address the risks that COVID-19 poses, including implementing robust contingency plans. Prospective buyers will be interested in seeing detailed plans and forecasts that set out the potential impact and risks that COVID-19 may have on your business going forward and the steps being taken to address potential risks.
The benefit of this preparation is two-fold. Not only will it show a buyer that there is a plan in place, but actually implementing the plans while the discussions continue will hopefully minimise the impacts of the pandemic on your business and help protect its value. Formalising and implementing your recovery plan is obviously an action item worth considering even in the absence of a potential sale.
2. Get your financials up to date
Being on top of your financials is a strong indication to a buyer that you are serious about working through the economic downturn. Prospective buyers are going to want to see that your business has been managing its finances over the past few months and that you have been keeping a close eye on the business’s operations.
Given the particular uncertainty around financial sustainability, buyers will want to know how COVID-19 has affected your revenue and will almost certainly request that you provide them with up-to-date financial statements for the past few months. The financials should clearly set out the amounts of any JobKeeper payments and other government assistance the business has received as these amounts could skew the revenue profile of the business. You should also carefully assess any unusual bad debts arising from COVID-19 and develop a strategy for dealing with these.
Financial statements can take time to prepare, and leaving a buyer on hold may suggest that you are not as organised or on top of your business as you should be. Your accountant can help you prepare up-to-date financial statements so that you can stay on top of your business and be ready to update a prospective buyer as needed.
3. Consider alternative deal structures
It is also worth considering alternative deal structures to the one that fell away previously. Even though your heart may have been set on full payment upfront, to get a deal done in these times you may need to consider alternative arrangements such as a partial sale, deferred payments or an earn-out to help the buyer mitigate their risk and manage cash flow. In particular, an earn-out tends to help alleviate a buyer’s concerns around the financial viability of a business as it means the financial performance of the business post-sale will directly impact the final purchase price.
Other structuring options include non-cash arrangements to entice buyers, such as entering into a joint venture arrangement where both parties share the risk in the business moving forward or formalised transitional arrangements where you would assist the buyer in the business for an agreed period of time after the sale. Consider also that some prospective buyers may have a preference for an asset sale rather than a share sale (such as if there is any risk that the business was ineligible for any of the COVID-19 government assistance it received).
4. Build tension
It may be easier said than done, but try to find more than one interested bidder or investor for your business and create some competitive tension between them. This is subject to any exclusivity obligations you may have agreed with an interested bidder, but if you can get multiple parties to express an interest, the ‘fear of missing out’ is a great motivator. It may even be worth underwriting some of a bidder's costs (e.g. for financial or legal due diligence) to keep them interested.
There is currently a lengthy process to obtain Foreign Investment Review Board (FIRB) approval for foreign investors acquiring Australian businesses (see here for our COVID-19 FIRB factsheet), which could mean that local investors should be pursued if time is a factor. Despite the current market conditions, there is still plenty of private capital in Australia, as well as from overseas, looking for suitable investments.
5. Get your house in order
If your business is not quite ready for a sale process, you should consider taking the time to clean up any business issues that a buyer may uncover during an exhaustive due diligence process. This will assist both in terms of facilitating a smoother sale process as well as getting the best possible price for your business.
Often, issues can be addressed with no or relatively little expense, they just need your time and attention. For tips on how you can prepare your business for sale, read our previous series on how to sell your business without losing business here or our discussion on 10 ways to ‘work on your business, not in it’ here.
Authors: William Kontaxis & Samuel Lane
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this newsletter is accurate at the date it is received or that it will continue to be accurate in the future.