Businesses can be affected by events that are outside an owner's control. The important question is what happens next - and whether the business can demonstrate a sustainable future.
COVID-19 and the lockdowns showed just how quickly trading conditions can change. Since then, New Zealand businesses have also had to deal with changing customer behaviour, economic pressures, supply issues, severe weather events and disruption across many industries.
If your business has been through a difficult period, that does not necessarily mean it cannot be sold. A business may have taken a temporary hit and recovered, adapted its business model, or emerged with new opportunities.
The key is to understand what a buyer is likely to see when they look at the business.
A business that has been through disruption can still be attractive to buyers if it can demonstrate three things: a sound underlying business, evidence of recovery or stability, and a credible future.
First, Stabilise the Business
If your business has recently been through a difficult period, selling immediately may not always be the best option.
Take time to understand what has changed and whether the business model still works.
Ask:
- Has customer demand changed?
- Have your costs or margins changed?
- Have important suppliers or competitors changed?
- Does the business need a different way of operating?
- Are the recent results temporary or part of a longer-term trend?
The objective is not necessarily to return the business to exactly where it was. The business may need to adapt to a new market.
A buyer wants to understand where the business is going, not just where it has been.
What Will Buyers Look For?
A buyer will generally want to understand the underlying quality and future potential of the business.
Three areas are particularly important:
1. Cashflow
Cashflow and profitability provide important evidence about how the business is performing.
If recent results were affected by an unusual event, make sure the circumstances can be clearly explained and supported by the financial information.
2. Systems and processes
A business that relies heavily on its owner can be more difficult to transfer.
Document important systems, responsibilities and procedures so a buyer can see how the business operates and how it can continue without you.
3. A business with a future
Perhaps the most important question is what the business could look like under new ownership.
Is there an established customer base? Are there opportunities to increase sales? Could the business expand into new markets? Is there scope to improve margins, marketing or operations?
A temporary setback does not necessarily remove the future opportunity.
Explain What Happened - Don't Hide It
If a major event affected the business, a potential buyer is likely to discover it during their investigations anyway.
It is better to be open about what happened and explain how the business responded.
For example, perhaps sales dropped sharply during a disruption but have since recovered. Perhaps the business changed its products, services, staffing or sales channels.
The story should be factual: what happened, what changed, what the results are now and what opportunities remain.
This can help a buyer distinguish between a temporary setback and a fundamental problem with the business.
Look at the Business Through a Buyer's Eyes
Before deciding to sell, take an objective look at the business.
Could a new owner see how they could make money from it?
Could they understand the reason for any recent decline?
Are the financial results explainable?
Are customers still engaged?
Are the systems and staff in place?
Is there a realistic opportunity for improvement or growth?
If the answers are positive, the business may be more saleable than you initially think.
Don't Forget the Opportunity
Difficult periods can sometimes create opportunities for buyers.
A business may have a strong underlying customer base but need a new owner with different skills, additional capital or a fresh approach.
A competitor may see an opportunity to add the business to an existing operation. An experienced operator may see potential to improve marketing or efficiency. An entrepreneur may see an opportunity to take an established business in a new direction.
The right buyer may see opportunity where the current owner sees only the problems of the past.
Should You Sell Now or Wait?
There is no universal answer.
If the business is continuing to struggle and there is little prospect of recovery, waiting may not necessarily improve the outcome.
On the other hand, if the business is recovering and there is a realistic opportunity to demonstrate stronger results, it may make sense to spend some time strengthening the business first.
Consider the likely benefit of waiting against the risks of further deterioration, changing market conditions and your own reasons for wanting to sell.
Get the Business Ready for Its Next Owner
Once you have stabilised the business and understand its future direction, prepare it for potential buyers.
Make sure the financial information is organised, important systems are documented, key contracts and assets are understood, and the business can be explained clearly.
Don't try to disguise problems. Identify them, understand them and be prepared to explain them.
See how to prepare your business for sale.
There Are Still Buyers
A difficult trading period does not mean there are no buyers.
Different buyers have different motivations. An entrepreneur may be looking for an established business to operate. An existing business owner may be looking for an acquisition. An investor may see an opportunity to improve the business.
Your task is to present the opportunity honestly and clearly so the right buyer can recognise its potential.
Minimise the Impact
Depending on the impact to your balance sheet, it is possible the goodwill component of your business - the intangible asset - has been harmed. The value of your intangible assets is based on the owner’s discretionary income over the last few years.
To help mitigate against this extraordinary event, business owners need to minimise the impact on profits and show a strong path moving forward. Smart strategies include adapting your business model to show a more certain future; and having a great recovery plan. Furthermore, it is prudent to work out where the market and money have gone – customers will still be spending, but their needs may have shifted.
Adapt to this and your prospects will be brighter.
Plan Before You Sell
Selling a business after a period of disruption requires a little more explanation than selling a business with a long run of uninterrupted results.
But the fundamentals remain the same.
Stabilise the business. Understand the numbers. Explain what changed. Strengthen the systems. Demonstrate the future.
If you can show a buyer that the business has survived the disruption, adapted where necessary and has a credible future, there may still be a strong opportunity for a successful sale.
Professional advice from your accountant, business broker and other appropriate advisers can also help you assess your options and avoid unnecessary financial, legal or commercial mistakes.