Article by Sarah Okeson, published in Barron's on July 1, 2020.
The pandemic is creating opportunities for investors looking to buy a business, as aging owners look to retire and struggling firms look to sell. But Covid-19 has upended how to value businesses, and how prospective buyers approach due diligence.
Early in the pandemic, researchers from the University of Illinois, Harvard University, and the University of Chicago surveyed more than 5,800 small businesses and found that three-quarters of respondents had only enough cash on hand to cover two months of expenses or less. Surveyed in late March and early April, over 70% of businesses then anticipated taking advantage of government aid, such as what eventually became the Paycheck Protection Program (PPP) that is part of the Cares act.
PPP loans, which can be forgiven entirely, should be taken into account when valuing a business, says the giant accounting firm Grant Thornton. Prospective buyers should also compare trends in Ebitda (earnings before interest, taxes, depreciation, and amortization) for the quarter before Covid-19 to months affected by the pandemic and management forecasts, the company says.
Brian Coughlin, a diligence senior associate in the firm’s Chicago office, says prospective buyers should look at how the seller is positioning the company for after the pandemic, and consider whether the earnout is based on historical revenue or performance after the pandemic.
“Deals and transactions have slowed in this environment, but they haven’t completely stopped,” says Eric Young, the transaction services director at Grant Thornton’s Dallas office. Young suggests that prospective buyers look at the historical baseline of company finances and how it has responded to the pandemic, including plans for the rest of 2020 and next year.
Buyers need to look at the customer base and determine whether the customers will have money to pay their bills, says Young. He also believes that while furloughs and layoffs can save businesses money, you need to look at what employees are left. “Are people going to be there going forward?”
So far, Mike Murzanski, co-owner of a steel fabricating company in the Chicago area, is holding on. He and his partner are retirement age and looking to sell their company. It won’t be easy, he says: “It could take years.”
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