Owning not only the present but also the futurePaul Monn - CEO Business Broker AG

Corporate sales during and after COVID-19 Owning not only the present but also the future

We asked our CEO, Paul Monn, about his current market assessment and the sale prospects for SMEs during these rather strange times.

Paul Monn, what is your assessment of the market for SMEs in Switzerland at the moment? Are companies being sold / bought at all in this extraordinary situation?

Paul Monn: «The situation is indeed extraordinary for all of us, and drastic in a number of ways. Nobody could have foreseen such an “event”, with such global consequences, let alone prepare for it. It has been a difficult few months for SMEs in particular. Basically, however, I am of the opinion that optimism should now prevail. Despite everything, there are a considerable number of entrepreneurs who are using the crisis to better position their companies, and some are even experiencing a real boom. Anyone who is unique, or has a robust business model, a competitive advantage or a proven track record of success, owns not only the present but also the future.

And yes, there is still a demand for SMEs and companies are still being sold. We sold around half a dozen companies during the lockdown. In the three months from March to May no less than 14 companies were sold. And these involved standard conditions of sale, without reduced prices or similar. After the initial sense of worry at the beginning of the lockdown, both sellers and buyers have remained remarkably calm and businesslike, which has impressed me a lot. There have been a few isolated postponements of transactions, mostly due to changed requirements on the part of the financing banks. This temporary credit crunch has now been overcome, and company acquisitions are being financed again. On the part of the buyers, demand therefore only fell for a short time, when many people were probably having to get used to a new normal, both at the personal level and in business terms. Demand has now almost returned to the pre-crisis level.

If we look at the currently ongoing sales processes, these have naturally had to be adapted to the prevailing circumstances in some aspects. For example, the negotiations between sellers and prospective buyers have primarily been conducted virtually. For two of the transactions, the buying and selling parties only actually saw each other face-to-face for the first time when the contract was signed. It is quite a change from the normal way of doing things.»

For two of the transactions, the buying and selling parties only actually saw each other face-to-face for the first time when the contract was signed.

How is the economic impact of COVID-19 affecting the saleability of SMEs?

Paul Monn: «This varies considerably, and the consequences of COVID-19 are primarily having a negative impact on many companies in the short and medium term. However, it is not possible to make blanket statements, as each company has to be assessed individually. Depending on the industry and the underlying condition of the company, the economic consequences are significant in terms of both positive and negative effects. There are currently some SMEs that can barely cope with the large volume of orders they are receiving, and are hiring staff and increasing their profits. On the other hand, there are unfortunately also entrepreneurs who are having to deal with ensuring an orderly liquidation of their business. Many companies were simply not prepared for such external effects and were not sufficiently agile and crisis-resistant. These points will have to be given significantly more attention in many companies in the future. There should always be a plan B or C ready in the drawer. This is part of the important strategic work that is unfortunately often neglected in SMEs, because resources are concentrated on the operational activities.

Many companies were simply not prepared for such external effects and were not sufficiently agile and crisis-resistant.

Fortunately, the majority of our clients seem to be coping well with the crisis. After the initial shock, previously deferred projects such as digitisation efforts have received a new boost, for example. This opportunity to “go through the books” has certainly been useful for many companies. So the crisis also has some silver linings. In many cases there will of course be slumps in sales figures in 2020, but these will also be explainable and understandable for buyers.»

Many SME entrepreneurs have taken COVID loans and/or registered for short-time working for staff. How does this actually affect a planned company sale (and or the value of a company)? What needs to be taken into consideration?

Paul Monn: «I have to split this answer into two parts. A distinction must be made between COVID loans and short-time working for staff. The ‘Ordinance on the Granting of Loans and Solidarity Guarantees as a Result of the Coronavirus’ stipulates that the paying of dividends and royalties as well as the reimbursement of capital contributions during the term of the solidarity guarantee is not permitted by the federal government. This prevents acquisition financing, which is largely financed through an acquisition holding structure. No exceptions are currently allowed or expected soon. So a COVID loan can actually become a factor that prevents a company from being sold.

Short-time working is used to preserve jobs and avoid the need for layoffs. For healthy companies with a stable business model, short-time working is a good instrument that can have a neutral or even a positive effect on an upcoming sale. The employer reduces the costs associated with staff fluctuations, such as induction costs, loss of operational know-how, etc., and retains short-term availability across the workforce. Employees keep their salaries and have greater security. We are currently assisting customers who are presenting their business operations, including the use of short-time working as a useful tool for coping with the crisis, and who therefore do not have to make any additional concessions in the final negotiations when selling.»

Should entrepreneurs who want to implement a succession plan preferably now wait two or three years, or just carry on with the implementation despite the crisis?

Paul Monn: «Generally, and looking back to similar situations in the past, it is rarely worth waiting. If you have decided to sell, you should get started with the project and not delay it. Our recent experience shows that there is still demand for companies. In the current market environment, so-called earn-out components will no doubt become even more important. In a purchase contract, the earn-out clause defines a part of the purchase price that will be paid at a later date depending on the success of the company. This price component can give both parties, the seller and the buyer, a degree of security regarding the sale and for the future.

In the current market environment, so-called earn-out components will no doubt become even more important.

Regarding prices, I would say that these are generally relatively stable in the SME sector, especially in the case of small to mid-range medium-sized companies, and this is likely to continue. This sector does not generally have major fluctuations, which is extremely helpful in the current environment. The price should therefore not be a reason to decide not to sell a company.

Depending on the constitution of the company, I would personally even recommend tackling the succession plan immediately. Firstly, the buying party has no memory of the so-called good times and, secondly, there is also more motivation and perseverance to tackle the big challenges in the current environment. Also, don't forget that none of us know whether things will look any better in two or three years' time. Can you and do you want to accept this uncertainty? We recommend dealing with the topic despite the uncertainties, because crises always also provide opportunities. Even if the imagined dream solution is now supposedly unreachable, an experienced sales consultant can help you to develop equally attractive alternative solutions. And as we are all affected significantly by this exceptional situation, I am convinced that there will be a kind of common understanding and that is how we will overcome the crisis.»

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