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Making the right choices in a time of crisis

helmrath-col-sigMaking decisions about the future of your business in the obfuscating winds of a still-growing global pandemic may seem counter-intuitive. Business owners can’t wait until the “dust settles” before determining how the economic fallout of the COVID-19 crisis will affect their business.

At this point, most business owners know the next six months will be challenging in certain industries. Whether it’s a supply chain disruption, an impairment in the ability to engage with clients, or a customer base paralyzed by a shutdown or drastic loss in revenue, businesses need to take stock of their cash flow situation and determine how long they can last under the current conditions.

Options will clearly vary by industry and size of business. Small, mom-and-pop sandwich shops will face far different hurdles than midsize professional services firms, but one factor remains the same: If you had a good, core underlying business with reliable customers before the crisis, you should have one after the crisis — if you make the right choices now.

As the pandemic launches the economy over the event horizon of what is now a near-certain recession, businesses in every industry will face similar tribulations, but the longer businesses wait to face the situation, the fewer opportunities they’ll have later.

Look for opportunities

Now is a good time to explore whether companies can reduce their risk via merger and acquisition activity, according to SC&H Capital Managing Director, Ken Mann. “Say your business has a high concentration risk with a particular customer or a particular supplier,” Mann explained. “If a merger candidate has a different set of suppliers or customers, you increase the value of both entities by coming together and reducing that risk. You really have to think about how much you rely on that one big supplier or customer and what would happen if they were unable to weather this storm.”

There won’t be a shortage of potential partners, Mann said. “Some businesses that are otherwise good businesses, that didn’t have underlying issues but were just unlucky to be in the wrong place at the wrong time, will be crippled by this and ultimately need to sell. It makes sense to get in front of that curve.”

The opportunities are largely available courtesy of near-zero interest rates and high market liquidity. If you were considering a sale or partnership in an industry primed for that, now is “not a bad time to move on that,” according to Mann. “The lower the interest rate, the higher the valuations, which may counter the negative pressures.” In this sense, “there is opportunity in this market.”

Quick reflexes

This window of opportunity won’t stay open forever, Mann said. “If, as is forecasted, we end up in a recession, the flood of new sellers in the market and the loss of confidence will create downward pressure on valuations. If you’re considering selling or merging to keep your business financially strong, you’ll want to do it before the realization that some of the weaker businesses aren’t going to make it through the crisis.

“If we treat this event as a recession, whether it technically becomes one or not, we can expect that transaction prices will eventually turn down. We know from past recessions, when there is a downturn in valuations, it lasts for a while. Prices movements lag after a recession ends, so if you can beat the other eventual sellers to the punch, you’ll fare better.”

There are opportunities with liquidity and low-interest rates to seek those kinds of partners that can de-risk a company and provide long-term value for both the acquirer and seller.

By the end of this crisis there will be a lot of distressed activity, particularly downstream from the oil, gas and travel and hospitality industries. The issue facing these industries is one of liquidity.

Business leaders should be proactive, find out with professional help what financing options are, and don’t assume to know what those are or are not. In times like these, you can’t know. It’s just like dealing with the virus: if you move quickly to deal with the challenge, you have a far greater ability to influence the outcome in a positive way.

Crisis leadership requires quick reflexes. If you perceive you may have a liquidity issue in the next six months, the time to plan for solutions is right now.

Christopher Helmrath is the managing director of SC&H Capital, the investment banking and advisory practice of SC&H headquartered in Sparks.