In an effort to continuously assist our clients and partners during this difficult time, we are launching Eaton Square Perspectives, a video series. In this brief 5-min video, our Principals from different parts of the world try to answer the most pressing questions business owners might have right now. For the premiere episode, the question we addressed is:
What can company owners do now, if they are thinking of selling their firms later in the year?
When I think back to the last two crises we suffered, in 2000-2001 with the tech wreck and the GFC in 2008-2009, one lesson resonates with me. In each case, when the market settled, I did a number of transactions and I saw a common theme develop. It comes down to this. Smart acquirers are not looking just for assets, revenue or profit. They are also seeking smart leadership that can supplement their own.
So, one inevitable question you will be asked by a potential acquirer will be – how did you respond to the Covid-19 crisis?
To be prepared to answer this question, I’d break it down into the following:
- How did you demonstrate leadership?
- How did you hold your team together, when many employees would be feeling insecure?
- How did you respond to your clients’ changing needs? and;
- What tactical changes (as distinct from business strategy) did you make to your business to respond to the needs of your clients, your staff and your shareholders?
How you answer this question will have a significant impact on how potential acquirers will assess your value. The ‘your’ in this context will be both you as a leader and how that leadership was transformed into the performance of your business.
The reason why this is important is that many businesses will use the Covid-19 pandemic as an excuse for their poor financial performance. That is an unsubtle defensive play. Potential buyers will soon get bored with this excuse.
To set yourself apart from the herd don’t use Covid-19 as an excuse. Use it as a demonstration of your ability to respond to the changing market, to respond to clients’ changing needs and to support your people in tough and uncertain times.
The call to action here is about fully documenting what you are doing now, your tactics.
In this way, when due diligence is performed on your 2020 financial performance you will have written evidence to support what you did. Capture the detail, the nuances of what you did. What worked and what didn’t. How clients responded. How staff performed.
Few business owners will do this. They will assume that Covid is giving them an excuse that will be accepted and not challenged. This is false. If anything, due diligence will be tougher.
So, documenting how you showed leadership, how you responded to the changing needs of clients and staff, will be a valuation differentiator.
Advice for Digital and IT Services firms in North America
Managing Principal, North America
I think the core focus of a company’s leadership right now should be to make sure they leave as many options open as possible. By this I mean that you come out of this crisis with the ability to grow, shrink, or sell your business, – and not have that decision made for you.
Right now the temptation is to focus on the parts of the business that you can control, notably the costs. So while this is naturally something leadership will surely have to do –
- manage costs
- reduce inventory
- exit staff
- access grants
- claim tax rebates
These are all good things to do – but don’t forget the other side of the equation; namely, REVENUE. The old adage is that:
“.. during good times you should advertise, but during bad times you MUST advertise…”
I’d suggest that we should transpose the word Marketing over Advertising, to ensure it covers the widest sense of Business Development to including Branding, Sales, and anything related to the revenue and reputational side of your business.
Looking back through previous recession, depressions, contractions (etc.), there is a consistent pattern that those who extend and increase their Marketing efforts come out stronger.
So if you are looking to sell your business or raise capital coming out the crisis, a strong pipeline and fervent clients will be critical to achieving the highest return and impact for you and your shareholders.
Some businesses will even have had to close their doors, but this shouldn’t mean the Marketing stops. If there really is zero income potential right now, look at what you could be doing to strengthen the brand. What will lead to the strongest recovery for you? Buyers or funders will appreciate your leadership in mitigating the challenges of the crisis, and it will differentiate you from the crowd.
In terms of Marketing costs, you might even be able to take advantage of attractive tariffs in traditional media. Or you could be smarter about where and how you focus your Marketing, to include digital channels and social media among others. So it doesn’t obviously follow that you should increase your Marketing budget, but you absolutely MUST re-double your efforts on your Marketing activity.
Private Equity and VCs Investment Focus
Managing Principal, Sydney
Those thinking about selling or raising capital, once this crisis is over, need to work on their Investment Story. We live in an ADHD world and stories are our most effective way of capturing attention and sharing information.
Investment Stories work best when they deliver a positive vision that is grounded with facts, supported by evidence and enriched with compelling examples. Picking up on Warren’s point, you need to think about telling a positive story about how you navigated the current situation,
Private Equity and other professional investors are data-driven types used to running the ruler over new businesses and industries, so sellers need to prepare themselves to educate these shrewd and skeptical outsiders on why their team, company and industry are a good bet.
Pinning down third-party data on market size, structure, competitive landscape and major trends – requires an upfront investment in time and ongoing effort to maintain. So starting early and methodically gathering materials means you will be ahead of the game in bringing investors up-to-speed and increase your chances of securing multiple offers.
Now whilst having the facts down cold, we are not going to stir any hearts without talking about growth. The best stories weave a narrative around:
- a golden prize (market opportunity)
- the hero (‘our solution’);
- supported with a backstory of who you are, where you have come from, where the industry is now;
- how competition and outside forces are reshaping the landscape; and
- how in light of these dynamics just ‘where and how’ you plan to expand
You need to paint a glorious but plausible future and outline your plan that bridges the story back to today, which may include a role for acquisitions alongside organic growth.
Lastly, before heading too far down this road, make sure to get informed about the market. We have all seen deals fall over after months of work, due to sellers who are unwilling to accept a price that falls squarely in the expected range for their sector and scale. A competitive process will always achieve a better result than dealing with a single party, but are talking about moving the dial up in a known range and this range can be assessed and socialised ahead of time.