Resilience is Key to Maximizing Selling Price

While many think that there will be a number of distributors, and maybe some manufacturers, that close due to COVID-19, perhaps the bigger impact will be on distributors who survive now, hoping for brighter days, but who only survive, struggle and ultimately sell in the next three years. Resilience is the the key to maximizing your selling price.

This was the point of a recent article authored by Brad Keyworth and Tom Williams of Lincoln International. (note, some liberties were taken to edit the article a little)

We see a stark bifurcation between companies that have adapted to the current climate and those that have not. This bifurcation will translate into valuations post-COVID-19. (and read the complete article for examples of companies that pivoted and adapted.)

Until recently, the U.S. benefited from the longest economic expansion in its history, breaking the record in July 2019, representing a decade of growth. As the growth trend extended beyond previous economic cycles, investor interest in companies that would not be materially impacted if the economy softened heightened. Accordingly, companies that demonstrated “recession resilience” sold at premium valuations compared to those businesses that were deemed more cyclical, with a valuation difference that ranged as high as 20% to 30% in some cases.

Today, the barometer of recession resilience is simply not enough. Investors are looking for companies that can weather the unanticipated and unimaginable—circumstances akin to a global pandemic.

While the world looks different than it did at the beginning of March, the economy and markets will recover with time. Many of the prevalent themes that fueled M&A for years such as strong corporate balance sheets and the amount of private equity sitting on the sidelines remain true. As investors look to deploy capital during or coming out of this COVID-19 period, corporate and private equity buyers will continue to be focused on recession resilience. However, what has changed is that there will be a new gold standard in the market, and that is companies that have shown to withstand a pandemic.

To help identify companies that meet this heightened standard, investors will search for the following characteristics:

• An entrepreneurial management team: Look for business leaders that are thinking about what they can do now to adjust their business models to make it to the other side of this crisis. Are they creatively creating new revenue streams? Are they identifying ways to cut costs or take advantage of government programs that do not sacrifice the company’s position in the industry or ability to aggressively take market share during the recovery? Management teams that are tested and thrive during unforeseen circumstances are signs of attractive targets.
• Sourcing and supply chain agility: The US-China trade wars and related tariffs marked a significant disruption to global supply chains. The coronavirus has proven to be an even greater disruption, signaling to investors that supply chain resilience is an essential skill set in our interconnected, global business climate. Companies that are able to quickly find new sources of supply and have adequate access to global markets can nimbly adjust their supply chains to meet heightened demand. As the next disruption is always around the bend, this skill will remain critical in a post-COVID-19 climate.
• Multi-channel strategy with an e-commerce presence: Both in this climate and looking ahead to tomorrow, the e-commerce component of a multichannel strategy is non-negotiable. Manufacturers and distributors with direct access to their customer base can target those users through highly effective digital marketing. Conversely, middle market companies without a digital strategy will struggle to compete—and may become targets for opportunistic consolidations at a discount.

How middle market manufacturers and distributors respond now will shape new narratives for these companies and how they will be positioned in the marketplace when they look to sell post-crisis. For this reason, it’s critical for companies to keep close records of how they are pivoting their strategy, and the implications for their bottom line. Today’s actions will become fodder for tomorrow’s pitch deck.

So, if you are an owner with perhaps a short timeline or perhaps no succession in the business, as you think of how the business emerges from COVID-19, adaptability, flexibility, resilience is key. Essentially, you need to show how you outperformed the market (didn’t decline as much!). Know your market share pre, current and post; be pragmatic in decisions; fund what is needed to accelerate growth cost-effectively; stay close to the voice of the customer so you can anticipate needs; trust your management team and act quickly.

And yes, sometimes a third party perspective can help. Give us a call and we can advise now to help you thrive.