Buying a Business During Covid
Buying a business during Covid requires careful consideration of a number of unique, pandemic-specific factors. As well as the checklist for buying an existing business, the pandemic and its unique operating environment have added an extra layer of things to look out for.
Acquiring a business during Covid can be an amazing opportunity for astute buyers who make smart, informed choices, and ask the right questions. There is little doubt that the pandemic has created challenges for businesses which not that long ago would never have been anticipated. Whilst there have been many unforeseen difficulties for businesses, what we have seen is that there has been a growth in some emerging industries and an unexpected resilience in others.
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Multiple factors create opportunity. We have seen good business fail purely because they undercapitalised and can’t weather the current storm. We have also seen a number of what are loosely called “baby boomer business” go on the market. Not because the business is struggling financially or is no longer viable, rather the pandemic has caused many busines owners close to retirement age bring their retirement forward. A common theme with those owners is that rather than battle on through the pandemic, they would prefer to sell out now. These factors are creating some strong buying opportunities.
What Makes a Business COVID Proof?
Whilst there are opportunities to purchase good businesses the fundamentals of business assessment and due diligence remain the same except there is now an overriding question.
- Is the business pandemic proof?
- Is purchasing a business during the pandemic, wise?
To answer these questions a buyer must carefully analyse that business sector. As a general statement, those businesses associated with hospitality such as – restaurants, cafes and hotels, have been hard hit by lockdowns.
But not all.
Those businesses that have been able to reposition from face-to-face contact to alternative methods of customer engagement such as to online offerings have survived. However, we have also seen businesses in strategic locations continue to thrive. For example, some cafes we act for which are in locations where people now do their daily walk are thriving. Anecdotally delivery services, logistics and meal preparation businesses are thriving. Likewise, fitness equipment companies and garden suppliers are also doing well. Read about covid-proof business models here.
However buyers need to be cautious and not look at just the headline number. The boom in some of these businesses may well not continue once things get back to a normal. For example, will people still want food delivery when they have the option to dine out? Or will they revert to previous habits of dining out? Businesses which sell products, memberships or services to help people through boredom might not necessarily be front-of-mind for consumers once lockdowns lift. In particular, when live, interaction freedoms return, online puzzles and collectibles may not hold the same appeal.
So care needs to be taken not to be buying at the top of the market. A business which experienced staggering growth during the pandemic may simply be peddling yesterday’s news once life settles down again.
Pivoting- Adjusting the Business Model During the Pandemic
We have also seen buyers adjust the business model of existing businesses to transition a business to become pandemic proof. Two proven examples are where one purchaser of a café, which had a strong local cliental and importantly a well refined database of customers, commenced a takeaway offering by partnering with a local wine store. Another who already had a basic online presence was able to ramp that up significantly.
These are just some examples of the opportunities which currently exist. To work around the impact of lockdowns and travel restrictions is essential. Businesses in high tourism areas which rely on tourists for the bulk of their revenue, are susceptible to the roll-on effects of travel restrictions and lockdowns. The consequences are even more severe when a business relies on seasonal tourism for the bulk of its income. Examples include alpine resorts or central Australian desert tourism operators.
The Price You Pay for a Business During Covid
Of course, what can’t be ignored is that businesses which have done well will be not be at a bargain basement price. But will the premium be justified when things return to normal?
Buying a business during the coronavirus pandemic carries risk- which in turn can yield ample reward for a good operator.
With distressed businesses, buying can be opportunistic in anticipation for when things change. One of the key factors in a business valuation is the ability of the business to maintain earnings. Where there is uncertainty about maintainable income, businesses are vulnerable. Purchases of distressed businesses also offer a way for more structured deals such as staggered payments linked to revenue. No one knows what the future holds and this gives buyers power to structure the deal. Another factor with opportunities that arise during anxious times, is that typically a buyer needs to move quickly. This is due to the growing presence of disrupted businesses for sale by anxious owners, entering the market. Of course, what can’t be ignored is that with a troubled business, there is a reason. The message is that when you look at a sector, you must understand the sector, and the key due diligence items. If you do, then you will be able to move quickly when an opportunity presents itself.
Buying a business during covid can be much less risky with sound legal advice. Our offices are open, and we have acted for many buyers of businesses during the pandemic. Complete the form on this page to connect with a business lawyer.