Closing Business Deals in the COVID-19 Era

The COVID 19 Era has begun. In addition to lives lost, there’s an economic toll that has yet to be determined at the time this content is being written.  With small businesses on life support, these are scary times for business owners and for the intermediaries helping owners navigate through them. So how has COVID 19 affected business transactions?

Closing Business Deals During A Pandemic

Deal Flow Down

There’s no doubt that Stay at Home Orders and an active virus threat are bad for business. Deals that were in progress going into the pandemic were paused, and some buyers walked away completely. Some buyers left deposits with sellers because the perceived risk was greater than the consideration they had invested in their deals.

And while owners of businesses had pre-existing desires to sell before the pandemic, many have decided not to go to market during the pandemic and are  focused more on their business surviving the event.

Hold On Financing

To further complicate matters, many financing deals were put on hold. When a buyer buys a business through a bank, he or she actually is doing two or more deals that need to close simultaneously. Some deals that buyers and sellers wanted to move forward with couldn’t get done because the banks became uncomfortable with lending money.

In addition, many banks shifted their priorities to servicing the new Paycheck Protection Program Loans, and 7(a) acquisition loans had to be lowered in priority due to new demands for PPP underwriting.

Hello Buyer’s Market

Almost overnight, what was a seller’s market for many years became a buyer’s market. The buyers who are calling during COVID are serious buyers, albeit with aggressive offers, and the dynamics have shifted. 

Furloughed workers are home and taking action on their lifelong dream to own a small business. The mix of buyers during the pandemic has been as diverse as first time tire kickers to savy deal veterans who have been positioning for market opportunities like this.  

Business Owners Suffering

There’s no doubt that business owners are suffering right now. Owners who planned to sell are worried about their e-business valuations. The first quarter of 2020 started off great but ended so poorly, and with so much uncertainty ahead.  

Many businesses are closing, and not just temporarily. For owners positioned to sell a business before the pandemic, the new government loans are not attractive even at the best of interest rates as they will be forced to come out of the owner’s proceeds. Even forgivable loans add complexity and time to deals as they can result in extended or conditional closing dates to ensure the business seller can meet the requirements for loan forgiveness.

A Post COVID Deal Environment

Different Deal Structures

Pre-pandemic, SBA loans were common financing vehicles for quality businesses for sale. If a business had verifiable income and was priced so that a buyer could make a living and support loan payments, an SBA loan enabled a buyer to make an affordable down payment and the seller to get most of the cash up front. While the SBA is sure to be back, it might take a while until things get to the point where they used to be. Until then, non-bank financing solutions are likely to become more popular and that means more all cash and seller financing deals. 

Funding through alternative  sources such as ROBs, HELOC, and unsecured financing may grow to fill the gap as well.

Deal Sizes Dropping

If credit markets do tighten, bigger deals could become more challenging as buyers either lack the funds due to the stock market drop or want to preserve their capital due to uncertainty. Smaller deals are more achievable without bank support and could be  more easily accomplished through owner financing. It may take time for the bigger deals to come back.

Buyers Seek Essential

In demand buyer categories may shift to “essential” businesses, as the strength of these categories has been underscored through the pandemic. The demands for technology and healthcare will continue to rise and the businesses that support them will flourish and consolidate. Real estate may be changed forever as we’ve learned how to work from home, and profitable home based businesses will rise in demand and value.

Uncertainty Is A Tough Environment To Do Business

As an intermediary helping owners with their options for exit, doing deals through a pandemic has a common thread.  Buyers and sellers are seeking to manage uncertainty. Not knowing when the country will get “back to business,” whether the recovery will be V-shaped or U-shaped, or how valuations and credit will be affected makes deals more challenging to accomplish. 

But where there is risk there is opportunity, and risk tolerance is a component of entrepreneurism. Those entrepreneurs best positioned to find new opportunities in the COVID era will survive and thrive. Flexibility and patience are the most important tools owners need to get deals done during and after the pandemic.