Episode 2: Can You Sell Your Business During a Pandemic?
Episode Summary
Owners of middle market companies are all eventually faced with how to exit their business - both to ensure the legacy of their business and to realize the economic value they have created. But what do you do if the time to sell comes right in the middle of a global pandemic? Should you push ahead or hold off? In this episode, we explore the pros and cons of selling your business in this environment - and what to do if you really need to sell in the near future.
Episode Transcript
Stephanie Chambliss Gaffin : 0:03
Should I sell my company? Should I sell my company now? Does being in the middle of the global pandemic make this a great time to sell my company? Does it make it a terrible time to sell my company? For small to medium sized business owners, if you hadn't thought about selling your company before, even if things have gone pretty well these last couple of months, I'm guessing that you're thinking about it now. Today, we will explore the question of whether this is a great time, a terrible time or somewhere in between, to sell your company. Welcome to Right in the Middle Market, a podcast about pragmatic perspectives on running, growing and selling your business. We talked about the challenges, decisions and most importantly, the actions business owners can take to create long term value in their companies. So, Mark, today I'd like to- I know that you've asked ton of good thoughts on this, you have worked for years, with business owners about whether it's a good time or a bad time to sell their business and helping them through that process, either consulting or now through our investment bank. But what I really want to dive into today, is the reasons why given that what's happening in the external environment, when you and I have talked about this, you've pointed out some great reasons why this could still be a really good time to sell your business. There are also some reasons why this could be a terrible time to sell your business. And so I'd like to explore both sides of the issue, and then spend a little bit of time talking about how could a business owner decide, how can they look at their business in this environment, and determine whether this is a good time or a bad time to sell their business? So let's start with what are the factors that you're seeing in the market right now? Why is this a good time to sell your business?
Mark Gaffin : 1:56
Well, look, I think if you go back to thinking about where we were in January, February, and all of last year, the economy was running really well. So, the underlying economy is not in really poor shape, per se, right? We had a health crisis, obviously, in March and April. But if you look at how the underlying metrics, if you look at job growth, if you look at retail sales, you look at all those kinds of things. You can see there's strength out there, and it's being perceived by the public markets. So the question you have to pull back from your original question is, is this really a bad time because of the COVID thing, right? And that you have to decide whether this is gonna be long term effects to this, or it's gonna be relatively short term. I'm gonna go back, is this the right time for me to sell my company- irrespective of COVID? So are we in the right, you know, internally? Do we have the right investment thesis that we're going to actually bring to outside investors or people that are buying the company? So if you're taking this company out to a private equity investor, there's still going to want to pressure test all the different assumptions, the team, you know, the go to market strategy, all those things irrespective of COVID, you have to have that we kind of call it, getting ready for the show. So we help a lot of folks and have through the pandemic, working on getting their, FP&A structure, the financial planning and analysis structure together, getting them ready to answer those types of questions.
Stephanie Chambliss Gaffin : 3:28
I know that normal course of business, obviously, we're talking is I've been talking with different institutional investors, so private equity firms, or family offices, other institutional investors, and I asked every single one of them that I've been talking to in the last couple of months; are you still looking for deals? Are you still looking for opportunities? And resounding, the answer has been yes. Especially interestingly, at the lower end of the middle market, for companies that may be what private equity firms call add ons. So they have what they call a platform companies, so they have a company in the space, they still want that company to grow. And so if there are good companies that are out there, they are very much interested in making those investments, because quite frankly, they still have capital that they need to put to work. And so they have the funds, they need to be able to put them into work. They want their portfolio companies to grow. And so if they have a portfolio company that's doing well, and they can find a an acquisition target, that is still strong, then I think this is something that absolutely, private equity firms are quite frankly, reaching out to us all all day long, asking us what companies do you have in the market.
Mark Gaffin : 4:43
No, yeah, I think you're absolutely correct. I think that the private equity folks I'm going to use them as an example first. The add ons now, they used to be about 30 to 40% of deals out there. People are buying platforms, using some financial engineering, actually making the compqnies grow. But then selling. That model has been replaced more by this buy and build model, which to your point you buy a platform and then you look for whether their capabilities or geographies or customer listings we talked about in the past, why strategically can you add, buy versus build to that platform. And so we've talked just on the phone yesterday with a very well established private equity firm here in the Midwest region. And they've done eight add on deals since since March. So, they're doing a bunch, they're looking at a couple platforms right now. I think it might be a little early to pull the trigger. Usually those are bigger, and you need to actually, you know, kind of get out there and dig into it a little more, where the add ons tend to be smaller, which to your point earlier, it makes it very, very attractive to folks in the lower end of the market. Those people with revenues of 5 to $10 million that have a special, sustainable competitive advantage in their niche, that those could be good add ons.
Stephanie Chambliss Gaffin : 6:05
And I think that's something else that I've been hearing, which is, when I asked private equity firms and other institutional investors about the types of deals that they're looking for, I've heard some of them talk about almost a bifurcation, that those companies that are continuing to do strong, and I mean, let's be honest, some of this has to do with the company, some of it just has to do with the sector that they're in. But that there's going to be a premium for companies that are strong that are continuing to have good performance through this period, because again, go back to the earlier point, there are investors out there that have capital that they need to put to work. So on the flip side of that, there may be a, I don't know what you would call it, not a premium, but a disincentive or a penalty almost for companies that are struggling right now. Would you agree with that?
Mark Gaffin : 7:03
Well, I think it depends on what's causing the struggle. Right? I think that if someone got caught a little bit flat footed - look, there was a very sudden, there wasn't a dimmer here, it was a light switch, really in a matter of a couple of weeks that this shutdown happened. So I think there is a willingness on professional investors to kind of look into that, what happened and what was the recovery? How do we survive? How do we, if we're moving into what we call the sustain phase, and then what are we doing actually looking forward? So everybody's going to have that dip, everybody, is going to have that dip. How did you respond? Were you able to get PPP? How do you manage your bank? I know there's a lot of people talk about the second quarter is going to be very interesting with respect to things like leverage, covenants. So people that had bank covenants, how are you dealing with your banks? And so if someone was actually in a situation where they defaulted with their bank, I can see as a professional investor, I'd want to make sure that I understood how is it happening. So we're helping a number of companies now, think through that, how do I manage the relationships with those capital providers so that that's not a problem in the middle of doing a transaction.
Stephanie Chambliss Gaffin : 8:22
So I think that's a great lead in to let's flip the coin. We've talked about some reasons that this may still be a very good time to sell your company, especially again, in that lower end of the middle market where we focus. What about, let's now talk about some reasons that this may not be a great time to sell your company. And if you have a choice to wait, maybe you should. The first thing I would put out there is you know, obviously, there's a lot of uncertainty in the market still. And it's always tough to figure out how do you value a company when there's a lot of uncertainty. Particularly in certain sectors.
Mark Gaffin : 9:03
Yeah, I think one of the things that's interesting if people tend to use a shortcut of multiples of EBITDA, and that's a great shortcut when things are, you know, relatively calm, and EBITDA, or adjusted EBITDA is a good proxy for cash flow from operations, then you can do that. But if you want to have the same valuation and EBITDA dropped for a quarter, then in order for you to maintain the same valuation, the EBITDA multiple has to expand, right? So, people are going like, "Why am I going to pay more on an EBITDA multiple, then not?" But if you're actually looking to intrinsic value of the asset, and that's typically done through, and we could talk about this in other podcasts, how you value companies from a discounted cash flow analysis. Which is what's happening in the public market. So if you use that lens, then is this really a bad time? Not really. In my mind, because I think that if you have a unique capability that a buyer needs. This is as good a time as any, right? Because what you're going to say is, look, if I'm in a sector, some sectors might be especially hot right now, if I was telehealth, be hotter than I was, you know, six months ago. Other areas might be a little tougher if I was in hospitality, if I was in, you know, restaurant chains and things like that, it might be a little tougher sell right now. But I think that the people that can show a rebound can show a reliable, or certainly, a credible return to operating performance in the past, shouldn't have, I don't think that they should say that this is just a terrible time to go.
Stephanie Chambliss Gaffin : 10:41
You know, I always take the operational perspective, that's a little bit of my bias and background. And, so I also think about, we have so many companies out there that are really focusing on how do we survive, how do we pivot? How do we make sure that we're staying as strong as we can? Even quite frankly, some that are taking this opportunity to say, you know, I heard the quote the other day, "Never waste a good crisis." I was reminded of that quote. Using this to say, how do we start to change operations, change culture. And so I also think about it from a bandwidth perspective, that I wonder if for some companies, they will get better long term value out of focusing on operations right now. And if there isn't a burning need to sell, they may be better served in the long run, to focus on some of that underlying improvement, look at margins, look at product profitability, make sure that they're pivoting to whatever this new environment is going to be for their particular business. And then in six months, 12 months, they will be very strong and then can be in that category we've been talking about, of the stronger performing companies that then will do very well in a sales process.
Mark Gaffin : 11:56
Yeah, I think you make a very good point there. I think that, what we've seen in the past, and some of us have been around longer than we care to admit. But you know, you've seen recessions come along, call it in seven, eight year cycles. And a lot of people use those as opportunities, as you pointed out to kind of, you know, look internally and say, where is there fat to cut? Let's be honest. Right? So Are there areas? Are there product lines? Are there staffing areas that I just need to really take a really hard look at? And it forces you to do that. I think that this is a great time to look internally, look at your capex programs, you know, am I really investing in things that are going to grow. Too many people in internal allocation of capital, kind of take a peanut butter approach. And they kind of give every project that they can, something. And actually saying, No, we don't have that kind of money, we have to really invest in the areas that are going to grow, that are really going to bring traction to help with the valuation of the company overall. That's where you have to invest. You have to make some hard choices right now. And then I think that that will be reflected in your ability to to sell the company, or quite frankly, just get growth capital.
Stephanie Chambliss Gaffin : 13:14
All right, we'll be right back after a brief word from our sponsor. Right in the Middle Market is brought to you by SLS Capital Advisors. SLS Capital Advisors is a boutique financial advisory firm, working directly with middle market leadership, to tackle critical growth opportunities including exit mergers and acquisitions and access to capital. The principles of SLS Capital Advisors bring deep industry financial and consulting experience to firms seeking tailored, strategic opportunities. Including capital for major growth initiatives and alternatives for those evaluating corporate transitions and exits. SLS Capital Advisor services include managing effective exits and sales processes, involving sophisticated buyers such as strategic purchasers, financial buyers and operator to operator transactions. And raising capital to fund our clients growth including debt and equity element. They also assist companies in capturing growth opportunities through focused and effective organic growth and M&A programs and unlocking profit potential through business portfolio, rationalization and divestiture. SLS Capital Advisors focused on delivering consultative executions for clients seeking strategic growth in capital. Find us at SLSCapitalAdvisors.com to learn more about how we can help you. Welcome back, we're here talking about, is this a good or a bad time to sell your company? Okay, so we've made some good arguments about why this can be a great time to sell. We've made some good arguments about why this can be a terrible time to sell. And the last thing I want is for a listener to come away from this arguing that we were wishy washy. So I want to maybe bring this down and talk about, I think we've hinted at it, but, all right. I'm a business owner or a CEO, and I've got to decide, you know, I've been thinking about selling, I know It's something I want to do sometime in the not too distant future. So now I've got to decide, should I sell or should I wait? So let's talk a little bit about given all these things that we've talked about, how do you decide right now? Should I embark on a process to sell my company? Or should I hold off?
Mark Gaffin : 15:17
I think one of the things that we're doing to help people, is you can make that assessment. How much work does it require me to get ready? How far am I really away from actually being ready to go to into a process? And if you've got three, four, five months worth of internal work to do to get to that level, then start now. It does nothing but help you get ready. I always tell my clients, I'd like you to be fully valued at any given time. I don't want you to have to get four or five months so that someone can look at you and say, yeah, I get what they're doing, why they're doing it. They're efficient, their margins are good. They compared great to other people in their sector. So I think that you never want to get to a situation where your backs against the wall. Now I have to sell. And look, there's a million personal reasons why people would enter the market, to exit. And you gotta take a hard look at that and say, look, if it's just, I want to go fishing in the islands, you know, at some point in 2021, perfect, then we're not going to run into your backs against the wall. But if there's a more specific defined timeframe that you're dealing with, right, and there's a number of reasons why those might be, then I think you're getting ready early is better, right? So you're not entering your process, with some with some urgency, which can be picked up as desperation.
Stephanie Chambliss Gaffin : 16:35
Well, and I think that's one of the things especially in the lower end of the middle market, in the small and medium sized companies, that you can't entirely separate the personal situation at the owner, from what's happening in the market. And so, you know, I look at it and say, you have to assess what's happening in your sector of the economy, what's happening in your specific company, and then you have to really look at and be honest with what's happening in your own personal situation. If you are in a position where you need to sell for whatever reason, there might be health reasons, there might be, you know, all kinds of things that could be happening in somebody's personal life, that really mean that they're going to be better off selling sooner rather than later. And in those situations, I would say, don't wait to start. Because especially in this environment, the process may take longer than it typically would, not necessarily, but it may take longer. Even just with travel restrictions, it's going to be a little bit harder to get through due diligence. And so I think, for somebody who is contemplating and thinks that there's some reason out there in the next 12 to 18 months that may put their back against the wall, to use your phrase, they're better off to start to explore now and at least understand what are the things that I would need to do. Who would be my likely buyers? How would I prepare for those? Can I start to maybe have some soft conversations? And you may think about this is where I think an external advisor can be really helpful. Because you may not want somebody to know that it's you thinking about selling. And an intermediary can be really helpful, to be able to have those outreach conversations so that there's a anonymized outreach to a potential buyer. Would you be interested in this kind of company? Is there an appetite for that? Is there an appetite for that, now? But you don't have to have the word out there, that everybody knows that it was you and you're thinking about selling your company, because people are of course concerned about what that might mean for their employees. Do employees get nervous and leave, do suppliers get nervous, do competitors get wind of that? So it can be a really good time to talk to advisor and have the conversation, help you explore.
Mark Gaffin : 19:04
Yeah, and I think another way to look at this too, it's kind of, if you will riff it a little bit on what you're saying is, something you may have to be open to now that you may not want to be as open to before, is structuring the transaction, there probably is going to be a request, especially if you're thinking about, oh, yeah, we're going to get back up to you know, 19, not 2019 levels 2020, early 2020 levels quickly. Well, someone may give you the benefit of the doubt and say, Okay, I think you're going to get there. But I have to structure where we are. And if I give you the benefit of the doubt, then we need to structure around them. There might be an EBITDA earn out or something like that, right? Well, we should go into structures of transactions at some point. But so, to your point about timing your personal situation, does that require a six month, a one year or if it's a two year EBITDA earn out? Does it require that so that's really important as you approach the market. Realistically, what am I going to need to do? As a founder, how long am I going to stick around? A lot of that has to depend on how strong the team is and how involved you have been with the company overall.
Stephanie Chambliss Gaffin : 20:13
So if your back is already against the wall, and if you are encountering one of those situations where you really need to sell in the near term, right, you're looking at something hopefully, it's not in the next three months, but you're looking at this and saying, I need to be out in six months or, you know, something, that would be a pretty short timeframe. What do you do?
Mark Gaffin : 20:37
Well, I think that there's, if you will, there's kind of that 80/20 approach, right? There's a lot of things that you can do internally, quickly, high yield, quickly implemented things internally that can get you to, if you're presenting yourself, to the market that much better. I think that the other thing is, you find an advisor, that has got the ability to talk to the right people. Right story, right people right time. Okay, so we're taking the time away a little bit in this scenario, but there's still the right people out there, right? So if you've got a good financial, if you've got a good business model and your finances aren't horrible, then there's people out there that can do it. I would say that you have to take an honest assessment about where you are right now. And you have time pressures, then that's going to be kind of exacerbated by the situation. If you're not in good shape, but you have to sell right now, there is a price that will clear the market full stop. But your expectations have to be a little realistic. And so that anything we can do to remove the time component, we had a client that we talked to in Michigan, that thought he needed to sell, he actually thought he needed to bring in investors and you know, we kind of worked with him to say no actually wasn't the right time, there was out another way out of this, you could get a general manager, right and do those kinds of things, too actually help you not have the time pressure. So pushing hard on that to say, are we really as up against the wall as we think we are?
Stephanie Chambliss Gaffin : 22:09
I love seeing companies that then can take a parallel process to be able to do all of those internal kinds of things to say, how do I look at alternatives? How do I make the company as strong as it can be in as short a time as possible? And, in parallel start to go out to the market, sometimes you're surprised to the upside. Sometimes you find out actually, there's a great strategic that would love to have the capability of what you do. And maybe there's actually a good deal to have to there. But you always want to be keeping as many options open as you can. So to be able to look at that option and do things in parallel. So I think in conclusion, we always like to take our two actions. So I think today, Mark, I'm gonna give you one action and I get one action. So two actions that somebody who is thinking about, debating about whether to sell their company, two actions they can take today.
Mark Gaffin : 23:07
So I'm gonna, I'm gonna look at like kind of the financial and forward looking, I think scenario or view of this. To me it's like I want to make sure the financial part of my house is in good order. Because do you anticipate the due diligence questions in that area? You know, what they're going to ask about, you know, relative profitability of different service lines, customer churn, those kinds of things, customer concentration. Those are questions are going to be asked, so we need to make sure that an external investor be at a minority, growth or a sale has a good picture of where we are, we can show them exactly where we are, and that we have a budget that we have a forecast for not just the end of 2020. But where do we think we can take the company, just on a standalone basis. So to me you need to have a credible growth story, there's value to this company now, because there's value to the company in the future.
Stephanie Chambliss Gaffin : 24:05
So the one that I'm going to focus on is and I always have a bias action. I'm going to focus on start now, if you think you might want to sell or might need to sell, start now. Talk with the advisors that you have in your business, talk with your accountant, talk with your attorney, to start to identify, get their perspective, honestly, if they can refer you to an investment banker who specializes in your size of company or in your market segment, to be able to help explore these conversations because most business owners that we talked to, they're great at running their business, and you start to talk about things like deal structure, and you know, obviously, good smart people. They understand conceptually what we're talking about. But that's not their area of expertise to be able to think about how might I go about that and to be able to take the temperature checks in the market. So the thing that I would say is if you think this might be coming, start now. Have the conversations, understand for your market segment for your business, Is this a really terrible time? Or is this maybe okay?
Mark Gaffin : 25:13
Yeah, completely agree.
Stephanie Chambliss Gaffin : 25:14
So hopefully this has been a helpful few minutes for you to listen to thinking about, is this a good time or a bad time to sell your company in this crazy environment that we're in? Today has been Right in the Middle Market. Please, if you've enjoyed today, subscribe so that you hear our next episode that's coming out. And always feel free to reach out to us. We love hearing from you. We love hearing your comments and your thoughts and also what other topics would be of most interest to you? What else would you like to hear us talk about? Until then, be well and be focused.