What forward-looking entrepreneurs look for in a crisis
When the Corona crisis picked up steam in March 2020, memories of the 2008 financial crisis naturally came straight back. Both happened very suddenly and resulted in a sustained global economic slump, in the course of which many companies had to file for bankruptcy. In my opinion, the experience of the financial crisis has had a major impact on German SMEs. It was the first situation where even younger entrepreneurs had to realize that all their assets were in the business and that without hedging or diversification they could lose everything very quickly. For this reason, we at Corporate Finance Mittelstandsberatung GmbH (CF-MB) are now receiving an increasing number of inquiries from owners of medium-sized companies who are looking for ways to put part of their assets behind the proverbial “firewall”.
Of course, a sale of shares is a good way of spreading the risk over several shoulders. However, the older generation of entrepreneurs has not forgotten the financial crisis either. In discussions on business succession, we experience that some entrepreneurs aged 55+ effectively no longer have the desire and strength to ward off another crisis and therefore want to initiate the handover to the younger generation prematurely. In each of these cases, from an M&A advisor’s perspective, how the company was doing before the crisis is critical. If the drop in sales can be clearly attributed to the Corona crisis, higher valuations can also be realized in the event of a (partial) sale. On the other hand, it will be difficult for companies that have already had to contend with problems in previous years. A great deal of experience and negotiating skills are needed to ensure that SMEs can still obtain a fair price for their own life’s work in such an initial situation. Professional support from an M&A advisor is therefore essential. To come back to your question: Although parallels can be drawn with the financial crisis and the effects of then have clearly left their mark, the Corona pandemic is the biggest crisis I have experienced in my thirty years of working in corporate finance/ M&A.
As soon as a company gets into a liquidity bottleneck or this is foreseeable, a professional inventory of the ACTUAL situation should be made. The following questions in particular should be answered as part of this analysis: How long will the money last (using various future scenarios)? Where are we losing money and are these business/product areas necessary for operations? Are there alternative revenue sources that can be tapped in the short term? What are the options for raising capital? Depending on the individual situation, concrete recommendations for action can then be derived from the respective answers. At the moment, we are observing that the question of capital procurement options in particular is causing headaches for many entrepreneurs.
Whereas in the past, liquidity bottlenecks could usually be cushioned by going to the company’s bank, banks are now becoming increasingly restrictive in their lending practices. Even if additional funding cannot be provided, entrepreneurs should still seek to speak with their bank advisor to see if they are eligible to apply for Corona assistance. At CF-MB, we also look with our clients at the extent to which there is the possibility of internal financing (for example, through factoring or asset-based finance). These are attractive options for improving your own liquidity situation in the short term. Another (and perhaps the most important) recommendation from our side is: Check the option of (minority) participation of an equity investor in your company. In the long term, we see this as the best way to save the company and private assets.
In an equity investment, an external investor makes capital contributions or contributions in kind to the company and in return receives a share in it. It is therefore clear that this is a long-term measure. A specifically selected equity investor can bring added value through its know-how, reputation, own network and operational experience that goes far beyond simply closing the liquidity gap.
I had already indicated that numerous companies were not doing well even before the Corona crisis. The situation has only exposed and exacerbated the existing problems. Therefore, it can only be an advantage to bring an additional partner on board who believes in the success of the company and wants to contribute to it. However, companies that were successful before the crisis can also benefit from the addition of an equity investor. By selling shares in the company, the existing group of shareholders can restructure part of its assets and thus put them safely behind the aforementioned firewall.