Understanding the impact of COVID-19 on business exits: Kim Klahn, of Lodders

Written by: Kim Klahn, partner at Lodders | Posted 05 June 2020 6:00

How has the world changed for those business leaders looking to sell their business in the next few years since the global pandemic took hold and business was forced into lockdown? Lodders partner Kim Klahn, head of the Corporate and Commercial practice, explores the impact on business exits and the options for owners looking to sell.

It is now many weeks since the UK was put into lockdown as part of its strategy to contain Coronavirus, and we are now into the next phase with some restrictions being eased. Lockdown has had an impact on every business in the UK, small or large and regardless of sector and industry.

For business owners with a clear exit plan in sight pre-lockdown, the shift in the economic climate will be a particular concern, as they assess the best options for them, and the future of the business.

Options and considerations for exit

For any business-owner selling a business, they need to ascertain what funds they require to enjoy their retirement after they have exited the business. This will no doubt have an impact on the overall deal strategy to release the amount of cash required and potentially the timeframe over which such funds are released.

There are generally four options for a business owner looking to sell their business:

  1. Sale to management – this option keeps the business private and hands over the reins to the next generation thereby retaining its culture. Staff are provided with security as they are familiar with the management team and their operations. Often, this type of deal is seller-led and usually requires the seller to agree to extended periods of deferred consideration due to the availability of funds, but COVID-19 may well have an impact on this aspect.
  2. Sale to a financial buyer – typically this option is right for business owners who are looking for high growth opportunities in order to see significant returns on their investment. This strategy can allow the seller and management to continue in the business in the form of equity and a share in future growth.
  3. Sale to trade – this option usually offers a clean exit to the owners, whilst for the buyer, it is about the synergies offered to their existing business. Due to the cohesion, trade buyers can see the value added to their existing business and so therefore may be more inclined to offer higher purchase prices.
  4. Listing – this is usually a way of raising finance for the company and spreading the risk amongst a larger group of shareholders. The original shareholders cash-in some of their profits but still retain a percentage of the company.

What is key to business owners, is maximising the value afforded to their business. They should consider putting practices in place now to make the business attractive to potential buyers.

This will include looking at revenues, potential growth, quality of the management team, and addressing risk areas for buyers.

Producing a strong business and strategic development plan with achievable forecasts will be particularly helpful for business owners and potential buyers in assessing whether the timing is right to produce the sustainable profits that will be attractive to the potential buyers and therefore produce the sale price the business owner is looking for.

Deal process

We anticipate that the deal process itself will be impacted by the effects of COVID-19, mostly in the following areas:

  • Due diligence: buyers are expected to undertake far more detailed due diligence to ascertain financials, enforceability and stability of commercial contracts and relationships etc.
  • Valuation: As detailed above, valuation is important and COVID-19 makes valuation challenging because of the uncertainty of its likely impact. We are seeing buyers focus instead on price adjustments and we expect to see a shift to post-completion account mechanisms being used. The risks associated with earn-outs and deferred consideration are likely to be unattractive.
  • Buyers are also likely to want provisions in the sale agreement allowing them to walk away from the deal if there are material adverse changes.

Long-term impact on M&A activity

The long-term impact on M&A activity including deal strategy, valuation, and liquidity, is as yet unknown. What we do know is that COVID-19 will have an impact on the shape of deals for years to come, and that things are changing on a daily basis – we are constantly evaluating the situation.

Certainly, this downturn market presents some real opportunities – some sectors such as e-commerce, home entertainment, and pharmaceuticals, are thriving. There are most definitely still deals to be done.

Kim Klahn is head of the corporate and commercial at Lodders. For a confidential conversation contact Kim Klahn, on 01789 206154, or via email.