What buyers should consider in today’s economy
private equity investment
Buying a business through a private equity transaction in the midst of a crisis may seem prudent, as buyers might expect to invest less for a higher return. However, even while many businesses are feeling adverse effects from COVID-19, it does not necessarily mean that buyers have an added advantage.
In fact, the financial considerations of buying a business today may not be much different than they were pre-pandemic, but it definitely presents new circumstances that need to be evaluated carefully.
Generally, there are three major types of buyers:
- Strategic acquirers, which purchase businesses that operate in similar or tangential areas;
- Private equity buyers, which are financial institutions that acquire companies to generate a return for their investors via a subsequent sale; and,
- Strategic buyers that are backed by private equity funds, which are a hybrid of the prior two groups.
BUSINESS AS ‘UN’USUAL
Under normal business conditions (that is, pre-pandemic), buyers of any type would have a lot to think about, especially how a company would perform and whether it was a safe investment.
Now, while there is less certainty about how a company will perform in the future, buyers are more critically analyzing the valuation of a business.
The most conventional means of determining value are predicated on mathematical computations and rely on financial results and forecasts, but amid COVID-19, future performance may be harder to forecast, placing doubts about whether a business is “worth” what its calculated value.
THE IMPACT ON PRODUCTIVITY
In addition, buyers are preoccupied right now. Their mental bandwidth is strained as they manage their businesses through the crisis. Likewise, financial institutions are helping businesses stay solvent to maintain operations or just stay in business. There is also uncertainty about when businesses can re-open and the operational mandates that will be placed on them.
And, while most have found a new routine in this climate, many are finding the new “normal” somewhat less productive, which inhibits their ability to process deals as efficiently as they are accustomed to doing.
Amidst all of this, buyers’ psychological states oscillate between their confidence and market outlook, which COVID-19 has clearly affected, placing additional strain on purchase decisions.
THE BOTTOM LINE
Revenue and earning potential are still major considerations when considering buying a business.
BUYING A BUSINESS? CONSIDER THESE CHARACERISTICS
Buyers should seek businesses with the following characteristics, at minimum:
- Strong leadership, prior to and especially during the COVID-19 crisis
- Solid operations, with up-to-date processes and systems
- Sector authority and positive brand recognition and reputation
- Engaged management teams
For more purchase considerations, view the RCP Investment Criteria.
Roebling Capital Partners make controlling equity investments in lower-middle-market companies who wish to expand grow or sell their businesses.
ABOUT THE AUTHOR
Keith Carlson is co-founder and Managing Partner at Roebling Capital Partners, a lower-middle-market private equity investment firm.