As we round out the first quarter of 2021, the most frequently asked question we’re getting from business owners is “How will the year of COVID-19 affect the sale of my manufacturing company in this financial downturn.”
The News Might Be Better Than You’d Expect
Many manufacturing companies had a very tough 2020. Even if they remained open, sometimes their customers were shut down or working scaled back shifts. Owners who thought they would retire this year are worried about how quality buyers will view a downturn in their financials during 2020.
How Buyers Are Viewing Acquisition Opportunities and a Financial Downturn
As a company that sells nationally and exclusively in the manufacturing sectors, my firm has unique insight into how quality buyers are viewing acquisition opportunities in which the target company had a 2020 financial downturn. What we’re finding is that if a buyer can get comfortable with answers to the following questions, the downturn may have little or no effect.
- Is the downturn an anomaly that is likely to not repeat itself?
- Is the target company returning to prior levels as we round out Q1 2021?
If the answer to both questions is affirmative, it’s entirely possible that the COVID downturn will not affect the valuation. The caveat to this is that a company must measure well in other factors affecting value. To learn more about 15 things that affect value, take a look at my article on business valuation HERE.
Buyers will always look at these 15 factors, whether we’re following a pandemic year or not. Companies that rank well in all these categories will always sell at higher prices than those who don’t.
Here’s The Bottom Line
So, the bottom line is this – if the company fundamentals are strong and it is returning to prior financial levels, 2020 will have minimal weight in the valuation.
Of course, there are some buyers who will always try to take advantage and will base their offers solely on one year. But that’s why you work with an M&A professional who will vet the buyers and turn away those who are trying to take advantage.
Manufacturing Businesses Are in Demand
Not all pandemic-related effects on manufacturing M&A were bad. Manufacturing was deemed critical and essential. Thus, manufacturers were open while other sectors were closed. As a result, private equities not previously invested in manufacturing are seeking acquisitions in this area. Everyone right now wants a COVID-proof business to invest in and manufacturing fits the bill. The increased competition is driving prices upward. Buyers with strong balance sheets are moving quickly, understanding that Sellers are concerned over the impending capital gains tax issues. We’ve had buyers recently close with all cash to avoid the delays of bank financing.
Conclusion
If you’ve been worried about your retirement because you think the Manufacturing M&A market might be bad or buyers may take unfair advantage of a 2020 downturn and a dip in your numbers, your fears may be unfounded. Many business owners who want to cash out and retire are worried they won’t be able to do that for years because of Covid-19. Nothing could be further from the truth. Investors with capital are always looking for opportunities, no matter what is happening in the market. If you want to be sure, click here to schedule a call with us. You’ll be glad you did!