Building Business Value in Good Times and in Bad

Many experienced business owners and management teams have lived through both good times and bad and have the scars to prove it.  Entrepreneurs late in their career may have experienced the exorbitant interest rates and high inflation in the 1980s, 911, the financial crisis in 2007/08, and the subsequent recession in 2008/09, amongst others.  Like every crisis, the COVID-19 pandemic has created challenges that require solutions that are unique to each business and industry.

For private business owners planning their exit, the pandemic can present some additional challenges.  Depending on the situation, it may mean that any exit plan that includes a sale is best delayed.  Perhaps there has been a drop in earnings and the business’s anticipated enterprise value, or there are fewer buyers with the financial wherewithal or interest in actively pursuing acquisitions.  Perhaps it simply creates challenges for buyers undertaking their due diligence as not everyone is able or comfortable with traveling or participating in face to face meetings.

Nevertheless, the demonstration of resiliency during adverse or unusual business circumstances, such as a pandemic, can enhance long-term business value and interest from multiple buyers.
Managing during difficult times usually means getting back to basics.  That is, watching and/or reducing expenses, freezing new hires, deferring non-essential capital expenditures, and perhaps even shutting down non-core parts of your business or selling off/discontinuing unprofitable product lines, etc.  In the current pandemic, it also means implementing safety protocols that keep employees healthy and limits absenteeism.

Presuming any downturn is not fundamentally permanent, the tough times can also create special opportunities as well; such as buying out a competitor or securing a “rock-star” employee or manager that has been laid off or downsized.

A business’s ability to survive a severe market down-turn boils down to two key items: 1) its capital structure, and 2) its management team and their problem-solving skills.  A well-financed business with a strong balance sheet and a talented management team that emerges from a downturn “leaner and meaner” is in a better position to withstand the next downturn and is fundamentally worth more to a buyer.

In some cases, when times are good and access to debt financing is easy and cheap, business owners are lured into investments that may impair their ability to weather the inevitable or unforeseen downturns.  Many businesses do very well during the good times simply because they have a “strong wind in their back”.  Sometimes this can lead to aggressive decisions on pricing to capture market share or recruitment of talent with “out of this world” salaries or incentives.  In good times, customer objections may be easy to handle with profitable solutions.  Even the poor performing salespeople, seem to hit their targets each month.  The key to management in the good times is to ensure that you don’t get complacent or sloppy.  A highly disciplined approach to investments and growth is critical.

It is also critical to build resilience into your balance sheet to withstand the inevitable turn for the worse that is down the road.
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So regardless of where your business stands under the current circumstances…regardless if the times are good or bad, entrepreneurs and management teams need to be keenly focused on continually improving performance across all functional aspects of the business and building resiliency into their capital structure.  As the adage goes, “Good times become memories and bad times become lessons!”

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