3 Things to Consider Before Exiting Your KC Business during a Global PandemicDavid Cawthon
By guest contributor, Jack Harwell, business advisor at Kansas SBDC at Johnson County Community College
Crisis creates opportunities. If you were planning to exit your business soon, the recent coronavirus crisis and accompanying economic recession may have you second guessing that decision.
So, should you sell now or wait for a better time?
As a business advisor with the Kansas Small Business Development Center at Johnson County Community College, I’ve helped many small businesses in the Kansas City area wrestle with this question, and with all that’s happened in 2020, there’s even more for you to consider as you weigh your options.
How to get started on your exit plan: If you want to know more about the basics of exit planning and some common strategies you can use (because at some point, you WILL exit your business), explore my overview blog where I answer some of the most common questions about exit-planning.
Ready to sell your business? Learn about the five things you can do to get the most money from the sale.
Before you move forward, make sure you’ve factored in these key considerations:
1. Start with your objectives
You should first reassess your objectives for exiting the business. What you hope to achieve should always be the guiding principle in your exit plan.
Do you want to optimize your cash payout, leave a legacy or ensure employment for your staff and a place to shop for your customers?
Do you prefer to continue involvement in the business and receive long-term benefits, or do you just want to cash out and walk away?
Because much has changed since the pandemic started, it’s important to revisit your objectives before executing an exit plan. You might need to adjust your priorities to better fit the current reality.
After your review, recalibrate your exit strategy to see if you can achieve your updated objectives in the current environment. Are you willing to accept less to meet your original timeline, or should you wait until the economic picture improves?
If you plan to transition the business to the next generation, either to family or employees, external factors may not affect your timing; in most situations, these plans can continue regardless of the price your business commands on the open market. However, if you plan to sell to a third party, the value of your business can be paramount.
2. What history can teach you, even now
There is great uncertainty in the market today; more than we’ve seen in previous recessions. While unemployment is at record highs, the recent stock market rally appears blissfully ignorant of the struggles that Main Street businesses are facing. This pandemic economy has been accompanied by several circumstances we haven’t seen in historic cycles, including lockdowns, social distancing rules and consumer fears of contagion. Predicting the future is always challenging, but it is even more so today, which can make it tricky for those looking to evaluate their exit strategy. The usual patterns of decline and recovery are sending mixed signals.
But we might still be able to learn something from the past. To anticipate how down markets might impact your business valuation, it’s useful to look at how business values held up during the Great Recession that started in 2008.
The graph shows the median price multiple for the sales of businesses sold in private transactions since 2003. A multiple is the price paid for a business divided by the annual cash flow (sellers’ discretionary earnings, or SDE). The larger the multiple, the higher the price.
Three revenue levels are shown in the graph, representing businesses with revenues ranging from $0 to $500,000, $1 million to $5 million and greater than $5 million. You can see the reduction in multiples that occurred from 2008 through 2010 for all revenue ranges. This reflects lower prices for those businesses selling during the Great Recession. The data also shows that valuations for small businesses have yet to recover to pre-2008 price multiples.
I recently attended an online conference of the International Business Brokers Association. During a panel discussion, career business brokers told us about their experiences during the Great Recession. What they said about business valuations confirms the data in the graph above. But they also noted that the number of deals increased during that time. In their view, two factors drove this behavior: owners throwing in the towel and dealmakers looking to snatch up a bargain.
History may not repeat itself in this crisis, but knowledge of past market behavior will help you better understand what could happen.
3. Trends are up for some, down for most
Different industries respond to recessions in different ways. Many businesses don’t do well in a recession, but some sectors do just fine. As you might know, this mainly depends on the amount of demand for their products and services.
Fine-dining restaurants usually suffer in a recession as many people shift to lower-cost fast food. Home remodeling sales decline, while do-it-yourself retailers see revenues increase.
In this crisis, companies that produce personal protection equipment for health care workers are experiencing explosive growth. The same is true for video conferencing service providers that host what has become the only practical venue for large meetings during the coronavirus lockdown.
The value of a business depends on the amount of cash flow expected in the future and the buyer’s perception of risk to those cash flows. A savvy buyer will calculate the prospects of your business while considering our anticipated “new normal.” Buyers will discount those cash flows if they think something will adversely affect revenues.
For example, restaurants can expect lower future revenues because social distancing means fewer customers dining in. The real uncertainty is knowing how much and how long. There is speculation that the risks of new pandemics will require businesses to adopt new policies permanently. This could seriously hinder the ability to return to pre-crisis revenue levels for businesses in some sectors.
The bottom line
If you’re uncertain about exiting your business, you should first reevaluate your objectives for transition. If you need to factor in the possibility of a lower sale price, and if you can map out a strategy that will reasonably meet those objectives, then exiting now might still be a good option. If you’re unsure whether the outcome will meet your objectives, maybe it’s better to wait for a time when the future is more predictable.
Need help planning your exit? The Kansas Center for Business Transition is a joint effort of Johnson County Community College and the Kansas Small Business Development Center. We provide tools and free advice to help small business owners plan and execute their exit from the business. Whether it is around the corner or years from now, you will exit your business. The Kansas Center for Business Transition can help ensure you exit on your terms.
Learn more about the resources the Kansas SBDC offers by contacting business advisor Jack Harwell at [email protected]. Also, explore free exit-planning tools from the Kansas Center for Business Transition.