While the pandemic has presented unforeseen challenges, it has also been a time to identify new and emerging acquisition opportunities. Small businesses in certain sectors have been negatively impacted by COVID-19, but others have held steady and even experienced growth. There are a multitude of factors at play right now that create an advantageous environment for those buying a business. From CARES Act incentives to low interest rates, along with the growth potential and glut of Baby Boomers eager to sell, many buyers are seizing the moment and pursuing a purchase.
That being said, lenders like Live Oak Bank have adjusted their criteria for a strong acquisition deal in the wake of the pandemic. As a prospective buyer, you’ll want to be aware of these changes and understand how to best position yourself in these unique times. It’s a favorable lending environment for both buyers and sellers but the deal must align with their lender’s current credit outlook. Potential buyers should consider these elements when identifying acquisition opportunities.
Know Your Industry
As we’ve watched certain sectors of the market get hit particularly hard by the pandemic, it’s important for a buyer to understand the industry of the business at hand. In general, hospitality and discretionary retail businesses have suffered from the wide-reaching effects of the pandemic. On the other hand, many industries are thriving. Essential retailers like grocery and liquor stores, manufacturing businesses, cleaning services, quick service and delivery food franchises, financial service businesses and auto-repair shops are just a few examples of small businesses flourishing as a result of COVID-19. Lenders will want to see a strong business model and one that’s capable of weathering these uncertain times. Buyers should be wary of concentrations in product, vendors and especially customers. Additionally, there’s less of a focus on start-ups, and more emphasis on established businesses that outlasted the Great Recession or at least that have similar qualities to ones that survived it.
When federal unemployment rates peaked this spring, cyclical and discretionary industries were directly impacted as data from the U.S. Bureau of Labor Statistic shows. Understanding how the pandemic, and subsequent shutdowns, affected the industry as a whole will be critical. If there is a potential second wave of the virus, how will the business and the industry in general fare? Noteworthy businesses include ones that have been able to not only pivot but prosper during this time, as a result of changes in consumer behavior due to increased safety precautions. Lenders will be asking questions with a new perspective and will want assurance that the prospective buyer has a solid grasp of how the industry was impacted, and how it’s been able to positively react to the crisis.
Know the Full Financial Picture
Even before the COVID-19 crisis, it was imperative to have a holistic view of the prospective business and its financial health. Typically, pre-pandemic, lenders would want to see standard financial documents including three years of tax returns, year over year profit and loss sheets and financial projections for the next few years. As banks continue to adjust their credit criteria as a result of the post-pandemic shift, painting an accurate financial picture can make or break a deal. They’ll want a more granular view of month over month profit and loss statements to truly understand how the pandemic impacted the business. If it’s evident that the business bounced back quickly from the shutdown in spring of 2020, then that sets a standard that the business will likely endure another similar incident – notably, a potential second wave of the virus. If there are cash flow performance issues that seem more permanent, the valuation will likely need to be restructured, along with a possible seller note or additional equity from the buyer to reduce the loan amount. Assuming the business was in existence, financials from 2008-2011 will also be a strong indicator of whether or not it’s able to survive an economic crisis like the Great Recession.
Get Adequate Funds
There are some new elements to take into account when it comes to funding the acquisition. When structuring the deal, consider building in additional working capital to support the business. Scenario planning is key here. Think through the various use cases for working capital that may arise, and plan adequately for those potential situations. Successfully navigating uncertainty takes organization, planning and yes – money. That’s where the additional working capital will serve as an asset. The seller may need to take on additional exposure or include a seller’s note to make the deal more appealing to a bank. If the seller has added “skin in the game,” it shows dedication from the seller and ensures an easier transition to the buyer.
Plan and Prepare
While there are opportunities to capitalize on right now, it’s wise to approach a business acquisition with a fully baked plan. This is not the time for buyers with weak financial profiles to buy a business. Lenders will want to see ample preparation and will need reassurance that buyers have considered the complete implications of the COVID-19 pandemic and a potential recession on the performance of the business. As a buyer, do your homework in advance of buying a business and be able to identify the right opportunity when it comes your way.
Buying a business means you can be your own boss and enjoy the many rewards and opportunities that come along with doing so. Download our “Guide to Buying a Business” today for an in-depth look at what is involved in the business acquisition process.