Besides creating a buyer’s market, the pandemic could see companies that quickly reinvent themselves maintain or even boost their value,
The COVID-19 pandemic has disrupted just about everything—and buying or selling a business is no exception. For some insight into where things are headed, we asked Pino Bacinello, founder and president of Pacific M&A and Business Brokers, which has offices in Vancouver and Kelowna. Bacinello, a seasoned entrepreneur, also offered some tips for buyers and sellers.
A buyer’s market
When it comes to buying and selling small businesses, many transactions have been put on hold, Bacinello notes. He expects the pandemic to turn the long-running seller’s market into a buyer’s market—a change that’s been predicted for 20 years.
Regrettably, many small businesses won’t survive COVID, Bacinello says. In a May survey by the Canadian Federation of Independent Business, 36 percent of B.C. respondents said their revenue had dropped by 70 percent of more since the start of the outbreak, and 13 percent said they were considering bankruptcy or winding down.
Among those that do pull through, a big share will have owners in their 60s, 70s and 80s who’ll say, “I’ve gone through this and I’ve gone through that and I’ve gone through 2008—I’m done,” Bacinello reckons. “They’ll sell.”
Bacinello thinks the switch from a seller’s to a buyer’s market will push valuations down—for some players, anyway. “The small businesses that will be able to be resilient, that quickly revamp, reinvent themselves, rebuild, those will maintain value and perhaps even enhance it,” he says. “I think many of those that will survive this will do well.”
For a business that’s had to close its doors, a lot hinges on what it’s done during the shutdown, Bacinello says. “If they’re just sitting at home doing nothing and praying and hoping, they’re not going to come out of this very well,” he explains. In his view, companies should be taking the time to reconsider their plans, what they do and how they do it. “Are there more-efficient systems and processes they can implement? Those are the businesses that I think will come out of this doing well because they’re going to hit the ground running.”
Cue the ambulance chasers
For anyone looking to sell their small business, there will be two or three times more prospective buyers than before, Bacinello estimates. He sees great opportunities to purchase companies whose current owner doesn’t have enough money to keep going or lacks the ability to reinvent things. “They can be picked up for very little, and somebody with creativity and business sense and astuteness can do very well with those,” Bacinello says.
Some buyers will be what he calls ambulance chasers—moneylenders and others with cash who prey on struggling business. On the other hand, there’s also plenty of capital in the private equity world. However, private equity buyers will be more cautious than they were pre-COVID, Bacinello warns. “They’re going to be looking at risk much more closely,” he says. “They’re going to be looking at cash flows and projections with greater scrutiny.”
If you’ve found a business that you think is a good buy even though the owner can’t carry on, do your homework. “Assess why has this business failed, why has it not rebounded,” Bacinello says. “Can it even rebound? What has that market done? What has that industry done?”
Ask what your cash flow will be, Bacinello counsels. “How much working capital are you going to need now if you buy that business, versus what that business needed pre-COVID?”
Then there’s sustainability. “How will this business sustain a recession coming through here with a longer stay than any of us would have anticipated or liked?” Bacinello asks. “Nobody has a crystal ball, but if you don’t ask the questions, you don’t know.”
Should I stay or should I go?
If you’re an owner who has to sell, Bacinello suggests getting a proper valuation. Many entrepreneurs have unrealistic expectations of what their business is worth, he notes. “One’s baby is never ugly, right?” says Bacinello, who has owned about 15 businesses over the past 45 years. “We always think the value of our business is greater than what the market thinks.”
Be as realistic as possible, too, Bacinello advises. “Consider the value drivers within that valuation,” he says. “Are there some things that you can do to raise the value to a higher level and stay with it for a little longer and get a little more?” The question every would-be seller should ask themselves: “Do I stay and grow, and do I sell and go?”