This article was originally published on The Globe and Mail on October 26, 2021.
After 18 of the most gruelling months in recent memory, no one could blame small business owners for wanting a new start – whether that means a new opportunity or an early retirement.
There’s good news for those looking for a change, says Alison Anderson, chief executive officer of SuccessionMatching, an online marketplace that connects Canadian sellers and buyers of small to medium-sized businesses.
“This is the best time in the last decade to actually sell your business,” she says.
It’s a welcome message for owners who have recently felt less-than-optimistic about the near future. The Canadian Federation of Independent Business (CFIB) estimated in 2018 that 72 per cent of its 95,000 members, representing $1.5-trillion in assets, hope to sell their business over the next few years. However, a survey the CFIB released in March found that 42 per cent of business owners say they will retire later because of the COVID-19 fallout and 57 per cent estimate the value of their business has dropped.
A delay in small business retirements could have a broad economic impact, including driving the continued sellers’ market with fewer companies on the market.
“One of the messages that I wish everyone in the country could hear is that there are so many buyers out there at the moment,” says Ms. Anderson, who specializes in transactions of $5-million or less. “There’s this common misconception from the seller side that no one’s looking to buy businesses, and it couldn’t be less true.”
Traditionally, she says, SuccessionMatching’s clients have been evenly split between buyers and sellers. However, that has changed in a big way in the past year. “We’ve had five times as many buyers as sellers sign up,” she says.
There’s also little sign that valuations have dropped, says Steve Chen, head of First West Capital, a Vancouver-based outfit that works with buyers to finance business acquisitions.
“There’s a lot of financing available for purchasers, and valuation multiples are rising,” he says. “It’s deal-specific and maybe region-specific, but I would say those are the overall trends. It is a good time to exit your business; if that’s something that you were contemplating.”
Getting the best price
There is, of course, a but: The fallout from the pandemic has complicated the revenue picture for many businesses compared to pre-COVID times. And that means that for some businesses, getting the best price in a sale may mean extra legwork.
The usual best practices still apply: Keeping clean financial records, demonstrating multiple years of solid revenue, having a management team that isn’t dependent on a departing owner to function and demonstrating, with reference to hard numbers, future growth potential.
Still, extra effort may be needed. While the best practices that applied to sale-ready business owners before the pandemic haven’t changed, they may need reinterpreting depending on how the pandemic has impacted revenues (positively or negatively), as well as supply chain and staffing issues.
“Smart buyers still going to do the same level of due diligence,” says Pino Bacinello, president of Pacific M&A, a business brokerage in B.C. “But you’re going to have buyers that are going to be looking at that resiliency factor more closely.”
He says there are two main kinds of circumstances in which that’s especially the case.
The first is a business that has seen a temporary boom amid the pandemic, which is unlikely to last long-term. Examples are companies involved in home renovations, real estate or just about any business heavily focused on e-commerce, as well as those that pivoted their business to address very COVID-specific situations.
“We had a business that we did an assessment of value for not so long ago and they started to get into manufacturing PPE [personal protective equipment],” Mr. Bacinello says. “They literally doubled their business, but they automatically thought that their value doubled. Well, that’s not so – that demand they addressed is going to fall off. That’s a big risk factor.”
The second situation is a business that has struggled through the pandemic, such as those in the hospitality and service industries or brick-and-mortar shops, particularly in areas hit hard by high case numbers and lockdowns. However, the positive here is that some buyers will see a business that has survived as having passed a built-in stress test.
“If you can point to several decisions or successes that a company has had during the pandemic, that’s proof there,” Mr. Bacinello says. “I think that’s going to be very positive for buyers.”
Still, that won’t override deeper, structural concerns.
Ms. Anderson cites the case of a brewery in Alberta that saw its beer sales drop because it was having a hard time finding aluminum to make cans.
“Supply chains have just wreaked havoc, saddled with different restrictions in different areas. It really is sector-specific,” she says.
Sellers will need to prove that these are temporary issues, or that they have a mitigation strategy, which may take extra time, Mr. Chen says.
“They’re probably going to work on their business a little bit more, and then sell at a more opportune time,” he says.
More buyers on the market
The overall market for sellers looking to exit their businesses is nowhere near as bad as was feared in the depths of the pandemic.
Not only have buyers not been spooked, but more are also entering the market. According to Ms. Anderson and Mr. Bacinello, private equity players have recently begun focusing on acquiring smaller businesses than they’ve traditionally considered.
“We’ve seen a lot of family offices and private equity groups that are creeping down into this sub-$5-million level,” Ms. Anderson says.
It can even be an option for financing employee buyouts.
“We’ve been matching those businesses to private-equity groups to finance transitions,” Ms. Anderson says. “Private equity loves it because the employees have been in the business for years, and that mitigates a lot of risk. There’s been a big shift toward this market for financing, and away from chartered banks.”
Ultimately, the succession apocalypse feared by many hasn’t come to pass.
Mr. Bacinello says that last year, in the depths of lockdowns and economic turbulence, he, too, had anticipated a growing buyer’s market. Now, he says, it’s clear that it won’t – at least not for sellers who are prepared.
“The key factors, as always, are having the right people in place, clean financial records, sustainable earnings and growth opportunity,” he says. “If you’re not at the point you have those things, you need to take the time to get the business in shape. But that’s always been the case.”