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Corporate finance

Business transfer during the pandemic? Don't panic!

November 1, 2020

Hundreds of businesses change hands every year. Despite the uncertainty the last several months has brought to many sectors, the economic cycle is continuing on course. If you were in the midst of a business transfer when the crisis hit, do you need to call it off? The short answer is no.

Monitor the situation closely

The time of uncertainty has been disruptive in many regards on both a human and economic level. But that doesn’t mean the transfer can’t go ahead as planned. Some sectors have been hit hard, but others seem to be managing alright. If you’ve been heavily impacted by the crisis, don’t panic. Your priority should be managing the uncertainty and protecting your company’s cash flow without losing sight of your ultimate goal: to complete the transfer. Even so, evaluating a company’s performance in the current environment is a challenge in any industry.

What’s the right price?

That’s the million-dollar question! When the economy is in crisis, it can be hard to get a clear handle on a company’s value. Don’t just look at the drop in earnings or the financial losses caused by the pandemic. Remember that the company’s value may be impacted in the short term, but not necessarily the long term. It’s also important to look at previous years’ balance sheets and future projections. A number of other considerations could influence the valuation as well, such as:

  • Does the business have a strong culture of innovation?
  • Are the industry’s long-term prospects promising?
  • Has the business taken advantage of government programs to protect its cash flow and keep its team intact?

The questions you need to consider are unique to each situation. Make sure you ask the ones that will give you the most accurate picture of the company’s adaptability and future outlook. Surround yourself with experts who can help you through the process and share their read of the market.

Once you’ve gone through this exercise, you may still have some doubts and concerns. You might realize you’d rather not go ahead with the transfer as planned. Still, that doesn’t mean you need to walk away completely.

Slow down so you can move forward

Be prepared for whatever happens by considering the big picture. This will allow time for the dust to settle, at which point you’ll be in a better position to transfer or take over the business.

The fact is, there’s more to transferring a business than transferring ownership. If the transfer is already under way, even delaying it or putting it on hold temporarily can give the buyer and the seller more time to work together and continue to get things ready.

Strategic planning

It’s always been a good idea to maintain a good cash flow buffer for your business. Often this buffer is needed to absorb miscellaneous transfer-related costs and to protect against unforeseen events. This kind of safety net is more important than ever. There are also certain questions that deserve more consideration:

  • If you’re the seller, are there any investments you could make to strengthen your business to prepare for the transfer? Or are there investments you should postpone? To ensure the future success of the business you’ve poured your heart and soul into, it’s best to minimize its vulnerabilities before making the transfer.
  • What investments should the buyer prioritize once the transfer is complete? Whether it’s replacing key employees who’ve left the company or repairing equipment, try to identify what will help the business ramp up again as quickly as possible.
  • Have clients and suppliers been adversely impacted by the events of the past few months? If you’re the buyer, anticipate any changes to agreements and explore new avenues as needed before you officially take over the business.

Despite the significant outlay required to buy the business, access to cash plays an important role in the health of a newly transferred business. By spending more time planning, you’ll be helping the business adapt to the major changes ahead and ensure that it can withstand any further disruptions.

The human factor

Transferring a business is also (and perhaps even mostly) about people. When a business changes hands, it changes management, shareholders and sometimes even some of its employees. Since the human factor affects all aspects of the business, it needs to be given just as much consideration as the financial factors.

  • Departure of key employees. Often a change in management leads to key employees leaving the company. Being proactive can help manage the transfer of knowledge and ensure a more seamless transition when the time comes.
  • Emotional attachment. When someone has invested their heart and soul into something, it’s hard to let it go for less than they think it’s worth. Keeping this in mind will help ensure a successful negotiation.
  • Adjustment to a new culture. New management and existing contributors need to get used to the other side’s way of doing things and their company vision. Aligning two different cultures perfectly takes time and could lead to a slowdown in business.

Surround yourself with knowledgeable partners

If you’re the seller, you have the support of your team and your network. If you’re the buyer, your pivotal role in the company’s future means you need to play an active role in the discussions.

To make sure the process goes smoothly for all parties, it’s a good idea to get strategic and financial partners involved early on, like your financial institution, a share capital partner and other professionals like a tax expert and a valuator.

With all these people looking out for the company’s success and sustainability, you’ll be able to come up with a scenario that works for you. Below are some examples of strategies you could apply in today’s uncertain environment.

  • Spread out the financial transaction. By deferring a portion of the sale, the seller continues to own a certain percentage of the business for a fixed period of time. This leaves the buyer more money to spend to make sure the business can thrive.
  • Use a share capital partner. Adjust the financing package you had in mind by increasing the shares insured by a partner like Desjardins Capital.
  • Consolidate. If the business is in a vulnerable industry, consider the surrounding market. By partnering with other business owners, you can all come out ahead.
  • Rely on a network of partners. Approaching retirement age but still haven’t found the right person to take over your business? A partner like Desjardins can leverage its network of business owners to help you find just the right fit.

Maybe you’ll find the best scenario is to wait a little longer before moving forward with the transaction. Regardless of which option you choose, make sure to find the right balance between the financing provided by different partners (loans, share capital, etc.), the balance of sale payable to the seller and the down payment. You should also keep enough money aside to protect against unforeseen events. When it comes to financing, remember that in an environment where the business could quickly become compromised by any number of variables, you definitely don’t want to stretch yourself too thin.

The golden rules: be patient and keep an open mind

In times of turmoil, every decision needs to be carefully thought out. Don’t be impulsive or rush into things, which could leave you in a financial hole that’s hard to get out of. Whether you’re transferring your business or taking one over, there’s a lot to be gained by taking it slow.

To come to a transfer arrangement you’re happy with, it’s worth your while to explore options you’d initially dismissed or never even considered. That’s why having a number of partners working to find solutions is so essential. Keeping an open mind will help ensure everyone gets what they want.

Regardless of how the impacts of the past few months have impacted your industry, it’s worth taking a step back when buying or selling a business. Slowing things down could allow the buyer to pay a fair price by getting access to appropriate financing and allow the current owner to sell the business for its true value and ensure its sustainability.