Sitting in our individual home offices in associated geographies on our weekly group video call, the Eaton Square team discussed how COVID-19 will play out in the coming months for our current clients and what the likely implications for the many business owners who are open to conversations but not yet committed to an exit process.
Here are our team’s 5 top observations and thoughts on some potential near-term actions that business owners might want to consider during the self-isolation lull:
5 Key Implications to Consider for Business Owners
- Procrastination over strategy execution. Timeframes for current conversations will stretch as buyers and sellers wait to see business trending back to normal trading conditions.
- Self-isolation accelerating digital businesses adoption. Ranging from video conferencing becoming the default for meetings to an increased share of spend for online retail. The acceleration of transition to cloud-based services will drive increased demand for Managed Service Providers, Managed Security Service Providers, Data Centres and greater high-speed internet connectivity. Concurrent with this will be a spike in demand for IT Services skills both to migrate legacy systems and to play competitive catch-up with new ‘born-digital’ upstarts.
- Tough times for impacted strategic buyers. Those strategic acquirers directly impacted will be focussed on preserving their cash. This may lead to some acquirers walking away or pushing for discounts.
- Financial buyers are still cashed up. Pitchbook, a private capital markets data service, reports that as of the end of 2019 there is nearly US$800Bn in Venture Capital and Private Equity ‘dry powder’, i.e. funds not invested. Whilst in 2000, and to some extent, in 2007-2009 we saw fund managers returning funds to investors due to the poor supply of investment-grade opportunities. Our view now is that most fund managers will stick things out on the basis that: i) this is an overdue correction to inflated valuations; ii) there is still a steady supply of baby boomer businesses owners wanting to exit; iii) COVID-19 will disrupt the market in 2020, but for quality businesses the impacts will wash out. The more adroit fund managers will see COVID-19 as an opportunity—not a problem. So sellers should remain prepared.
- Outlook for unprepared sellers isn’t great. COVID-19 is a stark reminder of how quickly buying windows can snap shut and illustrates the apocryphal saying in our world that ‘time kills all deals’. Too often we see deals fall apart due to sellers who struggle to get their information together quickly and so lose credibility. Or sellers who justify a valuation on sentiment, not fact or justifiable rationale. Competition obviously helps in valuation discussions, however, many unprepared sellers struggle to widen the buyer set beyond the ‘usual suspects’. Being prepared means you are proactively testing all corners of the market and getting clarity on how the market values your business. This does take time.
3 Potential Actions for Business Owners
- Transaction readiness review — find out what is involved in getting yourself ready to respond quickly in a sales process.
- Growth strategy and narrative — prepare materials to help educate buyers/investors from outside your industry about your competitive landscape, growth trends and likely future developments. Feed this into your own growth strategy and narrative around what you expect your business to look like in the future — and how it will get there.
- Valuation metrics and comparable transactions — find out how external investors or buyers will value your business; get to understand the valuation ranges and the factors that can help you achieve an exit in the upper end.
Whilst you are in self-isolation, take time to consider the opportunity this is giving you to reflect. We would be pleased to help you in this process – remotely! Feel free to contact me or one of my Eaton Square colleagues for a confidential discussion.
尼尔·伯恩
总监
Neil is the Managing Principal for Eaton Square Sydney. Neil has been working with growth stage technology business for over 15 years in venture capital and corporate finance. Neil is married to Sarah, has three children and enjoys Brazilian jujitsu and outdoor sports.
