Good opportunities likely to come up, but tread carefully

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A lot has changed in a few short weeks. Unfortunately, business and consumer confidence will not go back to pre-COVID-19 levels in a hurry. It will be a slow progression upwards as it always is after a major shock like this. Someone looking to buy a business may need to think about a few things differently.

I have some new questions that I think any prospective buyer should answer:

1 – What do the historic results of the business mean now? Are they repeatable?

Prior year results used to be considered a good guide for the future. There is no guarantee that all businesses will get back to those levels – indeed many unfortunately will not.

2 – How has the business’ asking price been calculated?

Historically the asking price is a function of prior year financial results x a multiple for risk (lower equals a higher multiple). There were often comparatives of what other businesses sold for that provided support for the value. This calculation may need to be adjusted to put more weight on future projections. Comparative sales may not be as meaningful. Understanding how reasonable the asking price is in the current market will be key.

3 – If you buy it, how long before you get back to business as usual or at least to breakeven?
4 – Is there still likely to be a core market for the product/services?

Businesses reliant on discretionary spend of all kinds will see a reduction. How much that may be is impossible to forecast. It is important this uncertainty is built into the sale price. It is also crucial that you do not just have one scenario of how the business may go but multiple. Things will not always go to Plan A – so it will be important to have Plan B and C ready and waiting.

5 – Will the existing customers still be in business and if so, will they buy from you or from someone else?

Can they pay you? How reliable is a customer’s payment history now in this new environment? Credit control will be a major area of focus moving forward and unfortunately there will be many stories of good businesses that are found to be swimming naked when the tide went out (due to soft credit policies).

6 – Is the business’ supply chain still as good as it was?

Disruptions to stock supply and potentially significantly higher prices given the lower NZD are going to have a prolonged impact.

7 – Can you get the enough finance to cope with multiple potential outcomes?

Now is not the time for most to borrow to a level that only is viable in your most optimistic scenario. Banks will be more careful and there will be less competition for new business while they hunker down. Banks are going to spend far more time wanting to understand all the factors above, before they put any of their own money at risk.

They will ask for more security then in the past. Finance will take longer to receive – you will need a longer due diligence period than previously

Banks will want to understand your recovery / buying plan and evaluate whether they think it is well considered and supported with strong assumptions to give them more confidence that your new business is a safe bet.

We are very fortunate to be in this part of the world, in that we are likely to get back to a new “normal” sooner than most. It will mean that there are good opportunities around to buy businesses.

However, life as we knew it has fundamentally changed for a good while to come.

I would recommend all business buyers tread carefully and get good advice as early as they can to maximise the likelihood of a successful outcome.

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About Author

Tom Beswick

Director at Ingham Mora Chartered Accountants in Tauranga, is a business advisor who specialises in buying and selling businesses. He can be contacted on 027-5744- 019 or tom@inghammora.co.nz

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