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Learning from the financial crisis

Lessons from the 2008 crash can be helpful if you’re considering exiting or acquiring a business in today’s pandemic-impacted world

Learning from the financial crisis

The impact of Covid-19 on businesses is often said to be as hard-hitting as the global financial crisis of 2008. In fact, the two are quite different in nature but if you’re exiting a business there’s plenty you can learn from hindsight.

“The 2008 crash was like a cliff-drop for businesses,” says Sue Green, Director at Watersheds Corporate Finance, “because there was a fundamental problem with the global economy itself.” After the crash business confidence was totally shattered across all sectors, banks completely stopped unsecured lending and potential acquirers simply sat on their capital afraid to spend it.

Consequently, exiting became nearly impossible and deals that did get off the ground were largely dependent on private equity companies risking their own money, and involved very deep and lengthy due diligence processes. It took two years before a semblance of normality returned to the market.”

Hope for exits

“In contrast, if you’re looking to exit today and play your cards right, there are reasons to be positive,” argues Sue, whose firm has recently completed two successful deals in the aggregates and online retail sectors. For a start, the impact of Covid-19 isn’t due to a fundamental global economic fault, nor has there been a total cliff-drop and, although business confidence has been knocked in some areas, it hasn’t evaporated.

In contrast to 2008, Government support has shielded both buyers and sellers from the worst economic impacts of lockdown. Enterprises have been financially supported by a range of interventions, including loans – such as CBILS – business rate support grants, furloughing and other schemes. Furthermore, while lenders are understandably cautious, some are still making money available to fund deals.

Sue adds: “Deals will progress more slowly of course and be highly sector dependent. Companies supporting health, infrastructure or the distribution sectors, for example, are perceived to be doing well, while restaurants and those involved in live entertainment have suffered badly.” This means that unlike 12 years ago, some businesses remain highly sought-after acquisition targets and while some have suffered worse than others the underlying sentiment is more positive.

Lessons learned

“As we discovered in the 2008 crash, if you’re looking to exit, you should start planning the process as soon as you can,” says Sue. “The earlier you begin the greater your resilience and flexibility to act when circumstances change – don’t just wait for things get better or you’ll probably miss your opportunity.”

While not as twitchy as in 2008, buyers, banks and other funders are still nervous about how much financial risk they’re prepared to take and will want to carry out very strict due diligence. “That means you cannot simply window dress your business,” says Sue. “Take a hard look and ‘kick the tyres’ to identify and remove – or mitigate – any potential problem for buyers or funders up front. At present, even a smaller issue down the line could destroy confidence in the deal.

“A buyer will want to see evidence of stable and sustainable profitability and growth coming out of lockdown. Ensure you’ve got a sound business plan, financial projections, cash and balance sheets and profit and loss records in place.”

Previous recessions have also taught us that strong and decisive leadership is valued by acquirers, so what you do now could be even more important when a buyer comes knocking. They will be impressed if you understand and can demonstrate how your enterprise is going to recover from crisis.

“Clearly, it’s easier to exit if you’re in a less badly hit market, but whatever sector you operate in you will face arguments from buyers to drop the price because of the ‘climate of uncertainty’ and claims that they need to de-risk their financing package,” explains Sue.

Buying opportunities

If Covid-19 now means this is not the moment for you to exit but you have a strong balance sheet, you could unexpectedly find that this is the time to become an acquirer yourself to strengthen and increase the value of your business. There will be good businesses that are seeking a cash injection right now to get them through the pandemic and others that simply need to exit.

Some owners close to retirement may not want to wait until the situation improves before exiting. “If you’re prepared to put in the working capital and do what needs to be done, you could end up with a very strong business,” Sue concludes.

If you are planning an exit or acquisition, get in touch with your St. James’s Place Partner.


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