In the first blog post in this series we proposed that the impact of COVID-19 on the price of an asset or business needed to be considered from three perspectives:
- The objective perspective: What is the business worth and has that changed as a result of the impact of COVID-19? Let’s just call that “fair market value”;
- The existing business owner’s perspective or to frame this as a question “has what a seller wants changed as a result of COVID-19 if all other things are equal?”; and
- The potential buyer perspective, again framing this as a question “has what a buyer is willing to pay changed as a result of COVID-19 if all other things are equal?”
In the second blog post we discussed the first perspective, the objective perspective and proposed that you cannot generalise what impact COVID-19 will have on the price of businesses. In the third blog post we discussed the second perspective, that of the owner and looked at what considerations and owner has when selling their business.
In this blog, we deal with the impact that COVID-19 may have had on the price that someone is willing pay for a business. Again, you can’t generalise, it depends on the mindset of the buyer and how that has changed, if at all, as a result of COVID-19 and its consequences.
The thought process about price for a buyer goes beyond the fair market value considerations we talked about in the second blog. The prospective buyer also considers:
- How easy it will be for them to access the capital (debt and equity) they need to buy and run the business;
- What conditions are being placed on them by both debt and equity providers, and their respective return criteria;
- How confident they are (personal risk profile) that they can grow the business better than the industry growth rate;
- Their perception of the entire due diligence process and what level of risk in the business that they have not been able to quantify;
- Their experience in the industry that the business operates in; and
- Whether it matches their other requirements for work/life balance.
Buyers may be willing to pay a higher price for business post COVID-19 if:
- They believe they can do a better job than the existing owner/manager;
- They have comfort about the industry the business operates in;
- The acquisition of the business is part of a broader strategy, for example consolidating an industry or segment using the business as the hub;
- They believe that COVID-19 will provide unexploited opportunities near to the business operations that the current owner has not foreseen; and/or
- The business performed well during a past economic downturn.
Buyers may be wanting to pay lower price post COVID-19 if they believe that:
- Access to capital (debt and equity) will be more difficult to obtain for the foreseeable future;
- The cost of debt increases (while interest rates are low and may go lower, there are some early indications that margins on top of the base rate have increased);
- The information provided by the existing owner is not relevant or does not give the potential buyer the ability to form a view as to the business prospects in a post COVID-19 world; and/or
- The business previously suffered badly in an economic downturn.
If you are a buyer of a business that sailed through the COVID-19 unimpacted do you think it is worth more/less/the same as before the COVID-19 crisis?
We’d love to hear your thoughts in the comments…
Ak Sabbagh & Lui Pangiarella