Covid is speeding up the timeline of company exits

An industry contact recently noted that it appears almost every business owner formerly hoping for a near-term exit is now moving their timeline back by at least six months or more. 

She asked for our thoughts, as we have helped hundreds of owners of privately held companies with business values ranging from $10 – $250 million in size successfully exit their businesses.

Are exits currently slowing? 

Yes — and no. Statistically, we’re seeing plenty of news that mirror the findings of a recent Datasite study noting that more than 66 percent of dealmakers say that Covid and its surrounding events have influenced timelines in one way or another and that the disruption has led to more than 50 percent delaying their exits. So, the word on Utah streets is correct but there’s much more to the story. 

Exits led by private equity (PE) firms and venture capital (VC) firms have made a strong rebound in 2021. After slowing to $6B last year during the pandemic they’ve quadrupled to $23.4B in the first seven months of 2021 according to data from IVCA (Indian PE and VC Association) and EY.  Here are a few reasons why we think that is happening. 

Change equates to opportunity for many 

The events of 2020 created an opportunity for many business owners, large and small, to take a step back as their businesses were either dramatically impacted by the Covid lockdown. 

This created a window of opportunity to look inward, with the help of trusted advisors, to identify the critical value drivers in their businesses. It is interesting, that in a time of dynamic change, the strongest entrepreneurs will purposely or even instinctively analyze the value drivers that increase the value of their businesses.  

An increasing number of business owners have contacted us for help in identifying the value drivers in their business as part of their exit planning process. We’ve also seen a marked increase in the number of internal transfers of ownership within firms. 

It’s a growing season for SPACs 

The current season has been an ideal time for many to consider acquiring others or poising for acquisition particularly in the form of SPACs, or Special Purpose Acquisition Company. SPACs have made it much easier and less expensive to enter the public market through a merger with an existing corporate entity instead of the long process required for a traditional IPO. 

An opportunity to expand and plan

The strong economy and strategic buyers flushed with cash create a perfect opportunity to merge with organizations in favorable geographic areas with similar culture and value drivers. This may be an ideal time to buy, while the re-alignment of organizations allows acquisitions to happen at a more ideal price point and with the benefit of time to allow new teams to blend and align. This is especially prevalent for traditional businesses that are looking for ways to diversify their client base or product offerings and to expand market presence through automation and e-commerce. Firms that fail to automate their processes and build online marketing will see the value of their firms decrease in the future.  Many firms are anxious to become more competitive in the market and more resilient to the current trends. 

For many others, we see an increasing focus on succession planning as they prepare to exit in the next five years. We have also seen an increase in ESOPs (Employee Stock Option Plans) for companies seeking to retain their culture and family legacy while also looking at exit strategies that reduce taxes.

Many business owners are exiting their business much later in life. This trend has led many business owners to implement a two-stage exit. Their exit plan transfers a portion of the company to a select team of managers, ESOP, or private equity group and they stay involved in a reduced capacity, advisory role or work part-time. This allows them to reduce their investment risk through a partial liquidity event. Then they focus their entire energy on increasing the transferrable value drivers, making their second stage exit even more profitable. This two-stage exit can be especially wise as it allows them to increase their financial or human resources with the help of others and allows time for current unpredictable events caused by the pandemic to improve. 

Two key trends

In all, we see two fundamental characteristics in this year’s trends: 1) The economy is strong, historic low-interest rates are very attractive and many owners have positioned their companies well to take advantage of the current dynamics.  2) Comprehensive exit planning is even more important than before and is being recognized as a critical factor in successful and profitable exits. 

Let me highlight that second point again: While far too many founders have tended to be complacent and postpone exit planning for an ideal economic climate, the dynamics of the current world are making it even more evident that advanced exit planning can create an ideal exit, in whatever form or forms it may take.  If you hope to exit within the next five years, you need to stop hoping and start taking executable steps to achieve the results you desire. 

And the verdict Is… 

We note that both the data and the word on the street on delayed exits are accurate. However, the statistical boom in the number and size of 2021 exits is also correct. The biggest discovery here is in the understanding of “why.” 

The good news is that we’re in a growing economy in which confidence for success among owners and investors is high. But preparation in identifying and executing the optimal exit plan for you and for your business is more complex and vital. 

The bad news, of course, is for owners who delay or fail to think about exit alternatives well in advance diminish their chances of executing their successful exit while taking advantage of tax-saving strategies. There remain far too many Boomer entrepreneurs who hold 90-95 percent of their assets in businesses they may not be able to sell with ideal timing or price, or worst case, may not be able to transition or exit at all.

But overall, the current trends for privately held companies are good news and can lead to the outcome we desire for all owners – an exit that occurs how you want it when you want it, for the maximum possible price.