Successful Business sale during period of Covid-19 uncertainty
During the period March 2020 to Dec 2020 as expected, it was extremely challenging to sell a business as most Buyers were extremely alert to the risk of the targeted business being adversely affected by the Covid pandemic.
Buyers always look at the financial trends when assessing a business and in the majority of cases, businesses were affected by the mandatory close down and “stay at home” restrictions imposed by Govt during the period April-June 2020. Thus this temporary close down would have affected the annual profits of a lot of businesses for the 2020 financial year.
The Term Sheet
The writer had negotiated a term sheet for the sale of a business in March 2020.
The term sheet included a provision that $500K of the sale price would be placed in trust for a period of 6 months to ensure that the seller, who was critical to the business, would provide handover assistance for 6 months.
When the Govt lockdown was announced the Buyer understandably put the sale on hold. In August the Seller advised the writer that whilst the 3 months period to June had impacted profits, the business was pretty much back to normal and this could be demonstrated.
As the agent I then reached out to the Buyer to advise him of the situation and the parties re-engaged.
Addressing Buyer Concerns
The 2020 profits did indeed reflect a drop of 10% from the anticipated profit due solely to the 3 month lockdown period. The agreed price negotiated in March had been based on the 2019 financials and anticipated profits for the 2020 year. Thus, in order to satisfy the concerns of the Buyer, i.e. will the business achieve the future profits on which he had based the offer, the terms were renegotiated on the basis that the $500K to be retained in the trust would now be conditional on the business achieving the same gross profit figure achieved in 2019, and subject to a formula.
The Seller was prepared to agree to this but only on the condition that he was employed for the 12 months to ensure that the business continued to fire on all cylinders.
The Purchaser agreed to this as it also reduced his risk for an adequate handover period. The earnout period runs to June 2021 and thus far is all on track.
In unusual times the selling agent needs to find creative solutions to achieve the sale objectives and to create a” win/win/win” situation.