How to successfully buy a business mid-pandemic

At BDC, we finance thousands of business transitions every year. We work with companies of all sizes in every business sector. 

This high level of activity gives us a clear, comprehensive picture of the business transition market in Canada.

Our Economic Research team also conducts regular research to understand the dynamics of Canadian business transitions.

For example, before the pandemic, our studies showed that 50% of business owners were planning to sell their businesses within the next five years. With more than one million SMEs in Canada, this means 500,000 companies could change hand by 2025.

My intention for this blog post is to offer insights on how the pandemic is affecting the business transition market in Canada and to share advice on how to mitigate the risks of an acquisition in today’s market.

The impact of the pandemic on business transitions in Canada

We do not yet know the pandemic’s long‑term impact on business sales and purchases, but the number of transactions clearly slowed down in 2020. The crisis also affected business sales prices.

Here are some anecdotal examples of what we have seen in the market since March.

Some transactions have been cancelled

A merger and acquisition transaction between two small construction companies was cancelled. The target is in good shape because its market has been spared, but the buyer has struggled financially as a result of lockdown. The buyer therefore withdrew to focus on its own operations.

Some transactions have been put on hold

The border closure appears to have had an impact on transactions. It has not stopped acquisitions but it is delaying them.

For example, we have a client who was negotiating a major acquisition in the United States. This company’s staff had to isolate for two weeks after visiting the target company’s facilities. So it couldn’t go there on any given day. The post‑acquisition integration and culture transfer also had to be revisited and reworked, which delayed the transaction by a few months.

Some transactions have been accelerated

We have a manufacturing client that took advantage of the crisis to buy out a small competitor that was trying to copy its model and take away market share. The competitor was not financially strong enough to survive the decline in volume brought on by the pandemic.

We are also seeing a lot of sellers who want to sell at the pre‑COVID price, while buyers want to take advantage of a lower price resulting from the pandemic. This dynamic tends to stall the progress of negotiations, thereby reducing the total number of transactions.  But the pandemic isn’t making anyone younger, and entrepreneurs who are interested in retiring remain so.

How to navigate the current landscape?

Don’t let the pandemic stop you. Entrepreneurs with sales plans should not put them on hold. The same goes for those who want to buy—yes, you have to do your homework, but there are still great opportunities. As always, pandemic or not, it is best to buy a business to which you, as the buyer, bring added value in order to make it grow and become better than it already is.

More than ever, acquisitions of businesses with clear synergies must be prioritized. The pursuit of critical mass is key. Two small companies will be stronger together if they can share the increase in necessary expenses for, say, IT security, system implementation or the structuring of an official human resources department.

We therefore consider the current climate to be favourable to strategic acquisitions. 

Consider a financing package that takes uncertainty into account

Uncertainty is the greatest enemy of business transitions. When you buy a business, you are buying its future cash flows. If you go into debt to do so, you have uncertain income and cash flows on the one hand, but fixed cash outflows for debt payments on the other.

The pandemic has increased the uncertainty of future cash flows for many businesses. So you have to compensate somewhere.

The solution is to convert fixed costs to variable costs. One of the areas where you can make this shift is in the financing package.

In recent months, we have helped our buyers create financing packages with a larger portion of the financing assumed by the seller through, among other things, contingent considerations (earnouts), which are payable based on the business’s performance. This is an option that is used to bridge the gap when the two parties have difficulty agreeing on the outlook for the coming years, which is even more the case in times of uncertainty such as in the middle of a pandemic.

We are seeing experienced entrepreneurs turning to institutions that are known for stability and long‑term vision and looking for financing that is repayable over a longer term, with payment moratoria at the time of disbursement and/or whose repayment is conditional on the company’s performance.

Be cautious about temporary increases in sales

Many businesses have seen their profits increase as a result of lockdown (hardware stores, recreational vehicles, swimming pools, cars, renovations, etc.).

In the context of an acquisition transaction, the assumption that this increase is permanent could do harm not once but twice: The company has just had an excellent year, inflated by lockdown, so its profitability is inordinate and its price higher. In addition, these businesses could slip back to below the 2019 “normal” in the coming years, as their customers may have lost their jobs or simply resumed their usual consumption habits.

There are also many companies that are not generating the revenues they used to but whose decline in profitability is not reflected in the financial statements because they have received government support. So background work needs to be done to distinguish between the effects of the pandemic and the company’s actual and repeatable profitability, whether it be a decrease or an increase in sales.

We also recommend that you look to the future and appreciate how the market could swing in the new reality. Keep in mind that the remote work trend is here to stay, which will cause permanent changes in consumer behaviour—lower demand in the formal clothing sector, for example, or reconsideration of the need for a second car or a tire change every three years. A rise in protectionism from government policies targeted at replenishing its coffers and gaining favour among voters affected by the pandemic could also affect our exporters.

This will enable you to have a realistic picture of the financial situation of the business you want to buy and to therefore pay a fair price.

Remote work and culture: Another challenge for mergers and acquisitions

Lastly, the crisis has added a new, more insidious risk for buyers.

When a company is sold, there is almost always a culture change. With the increase in remote work, the sense of belonging to a company is diminishing among employees. Informal human contact is rarer, making it more difficult to get an idea of how the employees feel and to send clear messages.

It will be more difficult to shape the culture you want to create after the transaction.

Human capital is the most important asset you will acquire, but you will have less access to it during a pandemic. Therefore, it is important to be well prepared to ensure success after the acquisition.

An ecosystem that’s ready to help you

The crisis has shown us the incredible resilience of entrepreneurs. Many businesses that were in growth mode were proactive: They reviewed their cost structure and focused on efficiency or found new market niches.

These efforts will help create healthy businesses that can become consolidators.

The investment community as a whole is now working to ensure that these businesses have the resources they need to continue to grow.

By supporting talented entrepreneurs who put their hearts and souls into running their businesses, we can continue to build Canadian champions. Please feel free to contact us if you have acquisition plans and do so well before you need to write a check: We accompany our buyers throughout the process, which normally lasts months or even years.