31 March 2020
The current COVID-19 pandemic has sent world economies into a tailspin. Equity markets are taking a hit as company values fall due to perceived increased risk and lower projected future earnings. Commentators are unanimous that a recession is upon us. We are also seeing wild swings across market indices as investors digest new information. Who would have thought the Dow Jones Industrial Average Index would experience double digit gains and falls one day apart? But, with volatility comes opportunity.
The ramifications for SME’s in New Zealand will depend on how long and how deep the downturn is. Businesses are responding as quickly as they can but for some it will be too little too late. There will be business failures, especially in industries such as tourism, hospitality, event management and entertainment. The flow on effects will impact us all. No one is immune.
Given the heightened levels of anxiety and uncertainty, it is not a good time to be thinking of buying or selling a business. Potential business buyers will want the dust to settle before making any major investment decisions. In this environment, historical financial performance of a business may not necessarily be a useful guide to future earnings. It will take time for the “new normal” to be understood.
Similarly, for those looking to sell their business, given likely negative impacts on their earnings and lack of clarity around what the future might look like, it would be better to wait until earnings settle down. The length and depth of any potential recession is unknown, but if it is short and sharp, earnings may recover quite quickly.
Buying or selling a business is no different to any other investment decision. Purchasers or vendors weigh up the pros and cons, understand the risks and make an informed decision. The timing of when to buy or sell can have a significant impact on value. Selling at the wrong time can result in value being left on the table (with the benefit of hindsight). Conversely, buying at the wrong time can result in capital being eroded.
As a rule, business buyers like to see at least three years of relatively stable profits or better still, earnings growth to have confidence. If a business cannot demonstrate this, it will not be an attractive proposition and be difficult to sell. If an offer is made, it is likely the value will reflect the increased risk and disappoint the vendor.
For vendors, a better strategy might be to hold off marketing the business for sale and instead focus on strategies to increase profits. For buyers, there may well be opportunities to acquire distressed businesses at a bargain. Time will tell.
If you require any advice on buying or selling a business, contact the Business Advisory team.
The views and opinions expressed in this article are those of the author/s and do not necessarily reflect the thought or position of Findex NZ Limited.