Were you planning to sell your business in 2020? – 6 ways to deal with black swan events
After 3 years of uncertainty caused by the ‘B’ word, the election result in December 2019 seemed, to many, to give a clear way forward. The endless commentary on Brexit seemed to go quiet. Brexit was getting done. Business too was getting done. The FTSE was on a high, business was ramping up and for owners of SME businesses looking to retire or exit, Q1 2020 was a great time finally to put the business on the market for sale.
Then from out of nowhere came the ‘C’ words - Coronavirus. Covid19.
Sudden events like these are known as black swan events - events that are extremely rare, unpredictable and have severe consequences. Granted, Covid19 is a pandemic like nothing anyone has experienced in our lifetimes and its full impact on the UK and global economy is yet to be seen. However, there are still certain actions business owners can take to ride the storm. And that’s what we’re sharing in this article.
Many of our clients have been in business for 20, 30 or even 40 years. They have seen their businesses through several black swan events, for example 9/11, and the financial crisis of 2008. They have survived many of these events, adapted and continued to prosper after they were over. That means it’s important to first understand that these events do end, and there is light at the end of the tunnel.
So, how do you deal with black swan events when you were planning to sell your business?
1. Remember cash is king
Many business owners we meet take pride in having no bank debts, having paid down any start-up loans years ago and often having built up significant cash reserves in the company. Often this cash is earmarked for extraction for the shareholders benefit on exit. However, it does provide a war chest to enable the company to trade through difficult times.
Whatever your company’s cash reserves, our view is that business owners should take full advantage of the Government support. The Government needs good stable and sustainable businesses to survive and lead the economy out of any downturn.
The support for businesses from the Government in response to Covid19 is unprecedented. Details of the Corona Business Interruption Loans (CBIL), rates reductions grants, job retention schemes can be found on the Government and Federation of Small Businesses websites. You should also consider R&D Tax credits particularly if you are redeveloping or re-orientating your products and services to adapt to the new market conditions.
Essentially, cash rich companies will be offered more favourable deals when the black swan event is over and you come to sell your business.
2. Review your products and services
When will things get back to normal? Will life and business return to how it was before? What will be the new normal? These are legitimate and proper questions to ask yourself during a black swan event.
At the start of a such an event, it is difficult to tell what the impact will be on the future. But a slowdown in business can give you an opportunity to reflect on what works well, what could be improved, what your market really needs and what other sectors your company can provide for?
Gaps in the market may open up that your company’s capabilities can fill. For example, with the Corona crisis, 3D printing businesses have been able to demonstrate their speed and agility in providing much needed masks and PPE for healthcare workers in amazingly quick order. Whilst this has often been done on a pro-bono basis, it has opened up a new market for many of these companies and there may be many other products to be designed and produced to address a myriad of challenges faced by the healthcare sector.
Remember that redevelopment of product or service may well qualify for R&D Tax Credits, (https://www.gov.uk/guidance/corporation-tax-research-and-development-tax-relief-for-small-and-medium-sized-enterprises#overview) which will enhance not only your cash flow but will be of value to any buyer of your business.
3. Identify and look after your key staff
In good times, developing a management team so day to day operations and client relationships are no longer dependent on you is fundamental to achieving a successful sale. Assuming you were well on your way to achieving this before the black swan event, keeping these key players in your business will not only see you manage and adapt through the downturn, they will be invaluable to you when it comes to the process of courting buyers for your company further down the line.
Identify those with key skills at all levels in your organisation and use the downturn in activity to nurture and train them. This will put your company in pole position to get back into action when the recovery comes.
4. Continue but adapt your marketing activities
For most businesses, ploughing on with the same marketing messages as you were a month or so ago before the crisis will likely not work, and in many cases could be counterproductive and insensitive. For example, a business broker declaring during a global lockdown that “now [during a lockdown] is a good time to sell your business!”, is probably not going to resonate with many.
As always, marketing messages need to be credible and valuable to your audience and target market so that your company maintains awareness of its products and services, and continues to develop credibility and authority in its brand.
Yes, the market requirement for your product or service may have reduced, whether temporarily or for the long term, and yes, cutting expenditure and conserving cash in a downturn is very important, but so too is maintaining the visibility of your company.
A good marketing plan depends very much on what your business does, but typically will include short-term direct sales campaigns such as pay-per-click advertising, telemarketing and mailings as well as long term business development, building a network of contacts and clients who refer work to you and content marketing developing brand awareness.
When a black swan comes along, there will be areas in which you can save costs and keep your powder dry for when the recovery comes – but you must also carry on promoting your company profile in your community and client base.
5. Plan for the recovery
Contrary to intuition, many insolvency practitioners report that they are most busy when the economy starts to recover from a downturn – not when a recession starts. Having battened down the hatches and ridden the storm, business owners are often caught off guard when the recovery comes. More work starts to come in, but cash reserves to buy in materials and labour are low, clients may not pay for 60 days or more, and things build to a crunch point.
To avoid this paradox, you need to plan ahead. Monitor your income and expenses on a weekly basis so you can get finance and funding lines in place ahead of time.
And finally, and of particular importance with this black swan:
6. Keep objective records of the impact of Covid-19
Unless there is a temporary closedown of a company in which case the impact is pretty clear, keep records of which customers have ceased trading, the order volume reductions from specific customers, the cost saving measures implemented through furloughing staff, grants received and overhead reductions.
All of this will help when it comes to selling your company in the future and will demonstrate to future buyers that Covid-19 was the reason for the drop in sales in 2020. If there is a rapid rebound in activity in your sector, business valuations should rebound in quick order too.
The recovery, when it comes, may be quick or it may take some time, and much will depend on the impact of the global lockdown on the global economy. In the microcosms that we in the SME sector operate in, we just need to stay positive, pragmatic and safe. That way hopefully we will soon be talking about the ‘D’ word - a good Deal for the successful sale of your business.
We hope this article has been helpful. If you could like any assistance with key decisions over the coming months, please, please get in touch. Our team has a lot of experience working with well established sustainable businesses and would be happy to act as sounding board or to provide a second opinion on any decisions you’re making during this unprecedented time.