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How to exit in 2020

Demonstrate strong leadership through the pandemic and achieve three months of stable, sustainable profitability and growth

How to exit in 2020

Business owners have been left in a state of uncertainty amid the Covid-19 crisis, and none more so than those looking to sell in 2020. But while the global pandemic has led to a pause in acquisitions, an exit this year could still be possible.

“Transactions are being put on hold, but it’s a postponement rather than a cancellation,” explains Andrew Lock, Co-Founder and Partner at LockDutton Corporate Finance. But after months of hold-ups on the completion of M&A transactions, the wheels of business are beginning to turn, and private equity houses are now saying they are once again open for business. Enquiries around new purchases are beginning to rise and buyers are ready to complete purchases that have been put on hold. “They have stated that for owners of businesses that have previously expressed a desire to partially sell or sell in future, then they remain keen to keep the dialogue going,” says Andrew.

There hasn’t been enough activity since economies around the world came to a standstill to know whether those looking to sell should be preparing for a slight downward adjustment in price. But what is certain is that owners of SMEs looking to sell have an opportunity now that they didn’t before, as Martin Brown, CEO of Elephants Child, explains. “The very fact that they’ve survived shows a lot about resilience and the nature of that business,” he says. “In the SME space, most business owners don’t have a plan, and those that didn’t have a plan during the pandemic are likely to have suffered more than others.”

Show leadership

And it’s at a time like this that leadership qualities can shine and impress potential buyers – or further impress existing ones. “It’s interesting to see whether entrepreneurs have been able to show their resilience by demonstrating that they are a good and competent leader,” says Martin. “A key strength of a good leader is forward-thinking: we understand we’re in crisis, we understand it’s been something like we’ve never seen before, but as a leader I’m still thinking ahead to that exit event and preparing as best I can for it.”

But how can you show proof of preparation for something as unprecedented as this pandemic? “It’s the old notion of controlling the controllables,” Martin says. “If you sit back and are overwhelmed, or are waiting for things to happen, you can blindly drift into a situation. Whereas if you start to think about the future and the things that you need for exit, you start to take control.”

In fact, there’s no time like the present for leaders to get their heads down and start working towards that exit. “If you wait for the pandemic to end – and who knows how long it’s going to go on – you’re just going to lose time,” explains Martin. “Having that business plan and the financial projections, the cash and balance sheets and profit and loss, in the form of an information memorandum is good work that should be done now.”

Return to growth

But a slow return to activity means an acquisition will still take time. The exact time period will vary between buyers or private equity houses, but there is one commonality. “The acquiring party will want to see a stable and sustainable level of profitability and growth for a period of at least three months,” says Andrew. “So, if it takes until September for the business to be back up and running at full pace, then by early December the acquirers will have three months’ active information and would look to conclude a transaction shortly afterward.”

And owners who have had to take advantage of government loans or furlough employees and are worrying about how this may come across, needn’t. “As long as their narrative is clear about how they would then expect to recover and move away from those initiatives, I don’t think that’s an issue at all.”

Buyers will, of course, need to know how the business has performed in previous years, and this will by necessity include figures over the period of the pandemic, but as important are the figures for the business’ recovery and what it will look like in the next three years. In the concluding words of Andrew: “There is no reason to believe that well managed businesses will not be successfully sold.”

The opinions expressed by third parties are their own and are not necessarily shared by St. James’s Place Wealth Management.