Exiting in a downturn
Every business owner grapples with the question of determining when to exit. But exiting during a major downturn throws up some unique factors.
A downturn doesn’t impact all businesses and all industries equally. Indeed, many can find themselves worth much more.
Essential services — everything from groceries, agriculture and healthcare to sanitation, trades and home entertainment — are likely worth much more today as a direct result of COVID-19.
Conversely, those hardest hit have seen their value eroded — even if only temporarily.
Consider how your business is currently placed and whether it makes sense to cash out now.
Doing the numbers
If your business is lucky enough to be in robust health right now, you may be tempted to go out on a high. But that could change rapidly.
Any prospective buyer of your business will want to know where your finances are at now AND what their prospects are going forward. Will your outstanding invoices get paid? Are they really sales or ultimately bad debts?
Reach out to your debtors and look at ways to help them pay what is owed.
Adaptability is an interesting point at present, with real implications for business value.
Manufacturing, for instance, had largely disappeared in Australia. But now companies are rapidly ramping this up to meet urgent need.
Global lockdowns have also forced us to look at our supply chains, putting the spotlight on locally made goods.
Examine how adaptable your business is before giving away the keys — you could enhance its value by pivoting to a different product or service.
There are plenty of examples out there right now on how to do just this: gyms becoming virtual personal trainers, distillers producing hand sanitiser, clothes makers making personal protective equipment, restaurants becoming meal kit makers… the world really is your oyster!
Is bigger really better?
In theory, you should grow and grow your business because bigger is better. But to do that means more risk and taking on more people. It’s here you can easily start leaking money.
Consider the disastrous results this has had for airlines expanding into unprofitable routes and retailers opening more stores than they can reasonably support.
So, don’t think that bigger always means more valuable. Instead, focus on being more profitable to maximise the value of your business before you exit.
Can you really afford to exit?
Many business owners forego paying themselves superannuation. Those who have have seen its value slump in recent weeks as sharemarkets crashed.
And if you operate your business with your spouse or partner, the impacts are multiplied — you’re both in the same business and same industry, meaning there is no diversification of assets and opportunities.
Sadly, it may be the case for some business owners that exiting simply isn’t viable right now.
It may be that you have to “hibernate” through the current crisis and rebuild value down the track.
Time to close for good?
Thanks to the lockdown, many businesses now find themselves with little to no income revenue coming in. Some are pondering whether it’s better to simply close for good.
If a permanent shutdown is on the cards, don’t overlook means of liquidating its assets.
A business is more than its revenue — it may own physical assets such as property and equipment, digital assets (like its website domain name) and a client database. Then there is brand equity — the goodwill of the name and brand you have worked so hard to build.
All of these can have a monetary value and could be on-sold to another business.
Helen Baker, licensed Australian financial adviser and author
Note: This is general advice only and you should seek advice specific to your circumstances.