While some businesses that have proved resilient in the pandemic have continued to be acquisition targets, for others exit plans were put on hold as Covid-19 disrupted trading. If you’re now thinking that 2021 could be the year for exit, we look ahead to see what to expect from buyers and how you can prepare.
Craig Hewitt-Dutton, Partner, LockDutton Corporate Finance, says: “No one can predict the future, but positive news about the pandemic – like a Covid-19 vaccine – could bring strong market growth in 2021, making it a very good year to sell a business. And it’s always the case that potential buyers will pay a premium price for the right business.”
There’s still demand, says Craig, from private equity investors, and some interest will be motivated by businesses protecting themselves against Covid-19 by diversifying. He also expects a new focus on acquiring UK companies as a reaction to the end of the Brexit transition period.
Whatever the business environment, Crawfurd Walker, Chief Revenue Officer for business growth advisors Elephants Child, says the same basic rules still largely apply if an entrepreneur is looking to exit in 2021. “Potential buyers will want to see a three-year business plan, sound trading figures and a good senior management team. As ever, they want to be confident about what they’re investing in – but even more so in this pandemic era.”
Proof of resilience
Both Craig and Crawfurd agree that how a business has responded to Covid-19 challenges is the new factor in determining how attractive it is to a prospective buyer. Crawfurd explains: “Buyers will want strong management that changed the business model to make it more flexible and resilient to something like Covid happening again and whatever the future business environment will be.”
Pre-sale negotiations and due diligence checks in 2021 could take longer than usual, says Crawfurd, and deals might be delayed until buyers have seen “six months’ of ‘new normal’ trading” so that a business can prove its resilience. “It depends on the company, and the changing pandemic situation, but that could be six months from October 2020, or from 1 January 2021.”
Business owners looking for a 2021 exit should bear in mind that a company saddled with debt will be even more off-putting for buyers than in previous years, says Craig, while the Covid-19 working-from-home revolution has reduced the importance of a company’s property assets. “The need for large, expensive-to-maintain offices is receding and buyers prefer leased property rather than anything owned outright.”
Entrepreneurs who mean to quit their business straight after its sale should also remember buyers need to feel sure the company can thrive without the person who created it. Crawfurd says: “Sometimes, the whole business is based around the owner so, in the nicest possible way, you need to ensure that you’re ‘redundant’. Have structures in place so the board can run it without you. Otherwise, the buyer could insist you stay on for a number of years.”
A business will also be more attractive to buyers in 2021 if it can show it has contingencies in place for the UK’s new relationship with the EU. Craig says: “That includes ensuring employees who are EU citizens have applied for the right to stay in the UK by the June 2021 deadline.”
But Crawfurd stresses that preparation sooner rather than later is the way to put a business in the best position to sell at a good price: “There are exceptions but preparing properly for sale takes 2-3 years. If you temporarily put exit plans on hold because of the pandemic, review them again as quickly as you can so that you’re ready to sell in 2021.
If any of the issues in this article applies to you, contact your St. James’s Place Partner who can help you explore your options.