Every Dark Cloud Has a Silver Lining: Five Things Business Owners Can Do in This Period of Volatility

We are all living in a very different world than just a few short weeks ago.  The recent volatility and declines in the public markets, coupled with the anticipated federal stimulus packages, doesn’t give business owners much to feel good about right now.  However, we learned from the 2008 downturn that this period of time will be a significant focus area for buyers years after this is all behind us and presents a handful of opportunities that private business owners can take advantage of to put themselves in the best possible position when the time comes to pursue a transaction.

1. Document the Qualitative and Quantitative Story

If we learned anything from the recession of 2008, it is that this period will be of particular interest to both equity and debt sources for many years to come.  It can demonstrate not only the strength of the management team but also what levers a business can pull in times of a downturn to steady the ship.  Whether you are thinking of pursuing a transaction in the next five months or the next five years, having a detailed story around the events that impacted both top and bottom line performance, including your response, will be critically important during any sale process.  Were orders late because of delayed imports from suppliers?  Did you close the facility for a period of time?  Did you sacrifice margin and bottom line profitability to keep paying employees?  These are just a few examples of the many types of non-recurring items, or add-backs, that your adviser can use to tell the story and adjust the financial results to present the company in the best possible light and maximize value.

2. Reexamine Supplier Diversification 

Historically, investors looked for diversification and backups in supplier name only.  While this pandemic is now global, it has highlighted that geographic diversification can be as important as individual supplier diversification.  Is your supply base concentrated in a certain geography?  If so, now is a good time to look into backup suppliers in other countries and continents if possible, to minimize potential supply chain disruption. 

3. Get the House in Order

For those looking to transact in the short- to medium-term, you can use this time to make sure you are prepared for the rigors of the diligence process.  Is your ERP system up to date and providing accurate and timely information?  Do you have all of your historical corporate documentation?  Are there any open positions that need to be filled in advance of a sale process?  Can you enter into favorable long-term supply contracts?  Is your estate plan in order (more on this below)?  If any of these are open items, develop a plan to improve them before embarking on a sale process.

4. Look Into Gifting and Estate Planning

While the recent volatility in the public markets have significantly impacted portfolios and retirement accounts, it presents an opportunity for business owners.  With markets currently 30% below levels just a few weeks ago, coupled with discounts for lack of marketability and minority interests, now could be a good time to gift shares and set up the necessary trusts as part of a broader estate planning strategy.  However, be sure to consult legal and tax advisers to make sure valid structures are used, and you do not inadvertently invalidate the current corporate structure.

Great investors like Warren Buffett have shown us that times like these can present unique buying opportunities.  Many of the most successful private equity funds have produced returns by buying smaller, add-on acquisitions at lower multiples and selling the larger enterprise at a higher multiple.  Well-capitalized private businesses with strong balance sheets may consider this an opportunistic time to pursue an acquisition.  With potentially diminished competition in the short-term from publicly-traded companies focused on stock prices and private equity firms and their leveraged portfolio companies focused on liquidity, now may be a time to consider a strategic acquisition that could make your business stronger and more valuable coming out of this unique environment.

As Sun-Tzu stated, “In the midst of chaos, there is also opportunity.”  Now more than ever, Shields & Co. is committed to helping its partners and middle market businesses capitalize on unique opportunities during these unprecedented times.