Think like a buyer: planning an effective exit strategy during Covid-19

09 Sep 2020

Arjun Chopra

Head of Private Capital

With building certainty around a forthcoming Brexit, alongside growing concerns of market turbulence as a result, the start of 2020 may have seen many UK entrepreneurs contemplating the sale of their business. 

Of course, then Covid-19 came along, causing many to cut their plans short.
 
While business acquisitions certainly took an initial hit at the onset of lockdown, Russell Warren, a Partner at law firm Travers Smith, says that despite this setback the mergers and acquisitions market has remained in remarkable health. Thanks to a combination of available debt, low interest rates and a resurgence in confidence, signs now point to a strong market for prospective buyers and sellers.
 
However, while this rightly gives reason for optimism, business owners shouldn’t be tempted into making knee-jerk decisions. Planning an effective exit strategy not only takes considerable time and planning, it is also crucial to understand a prospective buyer’s mindset. We spoke with Russell to explore why thinking like a buyer could help business owners better prepare for a potential exit during the pandemic.

What’s your story?

Investing in a business is a two way transaction. The buyer will be considering how their strategic and financial objectives will be enhanced through the purchase, and the seller will similarly want to understand how the buyer will assist the business in reaching its long-term aims.
 
Beyond this, Russell says that every buyer is also looking for the story behind the business.
 
“Most buyers, whether financial sponsors, institutional backers, or trade buyers will be interested in understanding the story for the business over the next three-to-four years. Whether that’s international expansion, growing the product line, or simply legacy planning, a buyer needs to understand what they’re buying into and how this fits with their investment thesis” he explains.
 
For a business owner, this means having a clear vision of what the immediate, medium and long-term goals for the business are, and how these will be met. It also means finding the right buyer who will understand and be able to deliver on that vision.
 
“In my experience, sellers are as interested in the price a buyer is willing to pay as they are in understanding how they will be able to help the business achieve it's goals" Russell adds. “Choosing your next sponsor or investor is so much more than just a question of money, it’s about finding the right fit, an investment of time, opening the right doors, and bringing their expertise to take the business to the next stage of development.”
 
He also comments that business owners should not just think of the immediate sale, but how their business’ story will affect the future plans of that buyer, which could range to an onward sale of that business or perhaps a long hold. “This is a smart way to make yourself as attractive as you can to potential suitors, by thinking about what they’re thinking about, rather than just your own position,” he explains.

The relationship game has changed

The deal-generation phase of acquiring a business - which can involve buyers ‘courting’ or tracking a business’ progress for several years before proposing an acquisition - has been significantly impacted thanks to our new socially-distant lifestyles.
 
Whereas previously a business owner would have sought to build face-to-face relationships with investors and prospective buyers at events, conferences and meetings, Covid-19 has in the large part made this a thing of the past.
 
Russell comments that, for those looking to sell, it will be important to consider how relationships will be built in the future. “It's this process which I think has been most disrupted by Covid-19...if you’re an owner wanting to generate relationships with investors, can this be done over Zoom?”
 
With the service providers involved with facilitating deals - such as legal, banking and accounting - having pivoted seamlessly to remote working, in most cases the processing of transactions hasn’t been impacted. The biggest challenge for business owners now, will not only be building relationships with investors but maintaining them in our new way of working.
Russell Warren

Most buyers, whether financial sponsors, institutional backers, or trade buyers will be interested in understanding the story for the business over the next three-to-four years. Whether that’s international expansion, growing the product line, or simply legacy planning, a buyer needs to understand what they’re buying into and how this fits with their investment thesis.

Russell Warren, a Partner at law firm Travers Smith

Demonstrating resilience

As the world begins to return to some ‘normality’, it’s likely the most valuable businesses will not only be those with a strong story and proposition, but those which have demonstrated resilience and an ability to adapt during the pandemic.
 
For business owners, demonstrating - first and foremost - how their business survived during the pandemic, as well as how it is prepared for any future disruption, will be a key defining quality.
 
Russell notes that for buyers, it will be important for them to understand why a business has been resilient during this period. “It's getting into the detail of understanding why they have been resilient. This leads into the question of whether they are a sound investment proposition.”
 
He continues, “I suspect lots of investors will now begin to ask business owners: ‘What did you do during the Covid-19 period?’ And ‘what does that mean about your relationship with your staff, your customers and your suppliers?’”

Handing over the reins

Last, but by no means least, it is important to think about succession planning.
 
Founder-led businesses built on the founder’s own blood, sweat and tears can - if not careful - become dependent on that individual’s involvement. From a buyer’s perspective this can be concerning if the vision for the business and its key relationships lie with its owner, especially if they are looking to retire or exit the business entirely.
 
Business owners must again think about what their story is: how will that story continue once they have left the business? Ensuring that the next phase of leadership is in place, and that all important relationships are handed over, will be crucial in this respect.
 
Succession planning is an important phase and shouldn’t be rushed. “These are long term processes,” says Russell. “You don’t just decide to sell your business and then work on a succession plan. This should already be built into your business plan before commencing the selling process. It should be a fundamental part of your story.”
 
What’s clear is that while the post-Covid market is certainly promising for business owners, taking a planned and considered approach with a clear vision will still be essential. Ensuring you have the right partner that can meet you eye-to-eye on that vision will also be crucial, and Investec’s experts are here to help provide the support you need before making that final hurdle.