Business Broker in Denver Colorado
I am a Business Broker in Denver Colorado, and I have been averaging two to three Zoom meetings and webinars per day to learn from the “experts” on a variety of topics and video platforms, and I now understand what “Zoom Fatigue” is.
When it comes down to it, only God knows what is going on and what the future holds for this “black swan” event the entire world is experiencing.
I believe these advisors have good intentions but how could they tell us what we need to do to get through this pandemic when no one on has experienced anything like this before? If you have wondered how COVID-19 will affect the value of your small business, you’re not alone.
It is our small businesses that will bring our economy back and believe it or not, businesses are still being bought and sold right now. As many business buyers in the past have asked if an acquisition opportunity was a recession-resistant business, I believe the question may now be if it is an essential or pandemic resistant business.
I can tell you personally as a Business Broker in Denver Colorado, and after speaking with appraisers, lenders, CPAs, and other advisors, the only commonality is that there really is no single answer on how business value will be affected since every business has its own unique characteristics and there are so many variables to consider as we’ve entered into this uncharted territory.
Assuming we do not have a reoccurrence of the virus soon, I want to discuss some assumptions when it comes to determining business value today.
The SBA lenders I originally spoke with regarding the impacts of the coronavirus on lending and business valuations early into the pandemic that felt they would simply disregard the temporary negative effects on the business after February this year are no longer taking this position.
This week’s consensus is that business acquisitions will be handled on a deal by deal basis and they are talking about seller notes with standby provisions and that buyers will most likely need to come up with some more down than in the recent past.
There are basically three types of small business situations today with respect to valuation: those that are essential, those that are partially shut down, and those with significant impairment or that have closed. The business owners in the last category are facing the tough questions of is it worth reopening versus operating at limited capacity. They will need substantial working capital, and the valuation process for these companies is now based upon their ability to survive.
Some appraisers instead of taking a weighted average of cash flow weighing more heavily on the last year will now look at a three-year weighted average that will weigh more heavily in the previous two years.
Yet others will be concentrating more on the income approach to business valuation, considering the present value of its future earnings or cash flows through projections and adjusting them for growth rate changes. Regardless, they will all be looking at how much working capital the business had before the quarantine and what is needed now on a month to month basis to survive.
They will also factor in any Payment Protection Plan (PPP) and disaster loan (EIDL) assistance provided.
Businesses value has always been driven by the cash flow and risk of the business, and this is still the case, however, appraisers are now considering the ability of the business to survive a short-term crisis and the future outlook of the businesses cash flow.
If a business is uncertain if they will be at full capacity between now and the end of the year, this is a risk component that appraisers will take into consideration. The risk is related to the multiple being applied to the cash flow to determine its value.
Another well-respected appraisal firm mentioned they will ask about a dozen specific questions to determine the current and future impact for the risk analysis to get a handle on what a business looks like post-COVID and how the business should be doing this time next year. They will also look at the pre-pandemic staff level and compare it to the business’ current staff level. If the level is similar, they will take a normal approach to valuation. If employment is hindered a bit, they will add some risk, which will lower the value a bit because of it. If they see a significant impact, they will take this into consideration as well.
For our businesses that have been closed for a while, appraisers will need to determine if they can survive, change their business model, or tweak it temporarily to fit the climate. They will consider its sustainability beyond the event with the amount of working capital needed to prevent the company from losing its customer and supply chain and shutting down.
Businesses impacted the most such as restaurants, hospitality, and fitness would need a strong buyer with industry experience for the SBA to remotely consider financing an acquisition like this. New buyers that may have had the ability to purchase a restaurant in the past will find it difficult to be approved by an SBA lender today.
Other businesses such as our hair salons that have been closed during the quarantine should bounce back quickly, and lenders realize that you cannot “Amazon a haircut”, so as long as the buyer is strong (business plan, experience, liquidity) these transactions should move forward.
Essential businesses should count their blessings during this time, as they have very sellable businesses.
Feel free to reach out to me with any questions you may have or if you would like to discuss planning for your eventual exit.
Certified Business Intermediary
Wright Business Advisors