Anyone not living in a cave is, by now, aware that much of the world is battling a new demon known as the coronavirus.

This malignant disease is having a major negative impact on everything from airlines, restaurants and local governments to weddings, sports, transportation and retail sales around the world. It was only a matter of time before we started getting questions about the impact of the coronavirus on the sale of businesses. Our business is not like the local bakery or car dealer. Such businesses seem to feel the impact of this outbreak almost as soon as the evening news is over. When authorities take to the media with warnings about staying home, staying away from crowds, keeping a two meter distance from others, businesses that cater to everyday purchases start to feel the hit immediately. Other industries – such as real estate brokerages, banks, business brokerages and the like – are more likely to be impacted over time.

The Reactions

The Possible Impact on the Sale of Businesses

In a more serious vein, there has been fairly extensive reporting about the projected impact of this virus on real estate sales. Open houses have been cancelled. Both buying and selling traffic is down; fewer buyers are calling about homes that are for sale and fewer homeowners are calling realtors about selling. This, in spite of the lowest recorded home financing rates ever, at least in the U.S. Similarly, business brokers and business owners – no matter where you are – are going to be impacted by this virus, as well, and for many of the same reasons. People are hunkering down. There’s a discernible level of fear in the air. Here are some issues to consider

The Impact on Available Capital

Buyers of small and smaller mid-size businesses generally must have anywhere between 15% and 30% of the purchase price of a business to put into the deal. Buying a $2 million business will likely require about $500,000 in cash from the buyer. (The balance can usually be financed through some combination of an institutional lender and the seller.) Where do they get that money? I don’t know of anyone that keeps that kind of cash lying around. It’s invested somewhere. In our experience, buyers get that money from their investment and retirement accounts. We’ve found that, in the U.S., IRA and 401k accounts are the main source of a buyer’s cash. But stock markets around the world have cratered: down 30% in London, 33% in Paris, 33% in Frankfurt, 28% in Tokyo, 35% in Sydney and, as I write this early on 16 March, more than 25% in New York. Everyone’s individual financial statement is between 20% and 35% weaker than it was just weeks ago. On top of that, oil prices have fallen off a cliff – down nearly 50% from their highs just 90 days ago, helped in large part by the new feud between Russia and Saudi Arabia. This has impacted everything from Blue Chips like Exxon/Mobile (down more than 50% since the start of the year) to the sovereign wealth funds of Middle East nations. Normally, such a collapse in oil prices would boost airlines and other travel-related industries because it makes travel much cheaper. But nobody’s going anywhere! This morning, I received a notice from the International Business Brokers Association (IBBA) that this year’s annual convention, scheduled for April, has been cancelled. Companies in travel-related industries are getting clobbered. The result of this is that a good portion of the business buyers out there have significantly less cash to put into a deal. That will either sideline many of those buyers until the financial environment changes or change the size of the businesses they’ll consider. On the flip side (there’s always a silver lining), interest rates are now at their lowest levels in… well, maybe forever. Central banks are flooding the markets making capital cheap. Property refinancing – both commercial and residential – is expected to climb. Borrowing to acquire a profitable business – at the correct valuation! – should be relatively easy, once things settle down.

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The Impact on Valuations

And that brings me to the second big issue: business valuations There’s no telling how long this crisis – both viral and economic – will last but if there is anything less than a quick rebound, valuations will fall. Why? Because if revenue falls, earnings will fall. And buyers pay for earnings. If historical data says that buyers will pay 2.5 times the earnings of lower Middle Market wholesale businesses, such a business with $1 million in earnings will be valued at about $2.5 million. But if that business’ earnings abruptly fall to $300,000 – and stay around that level for a year of two – the value is going to be a lot closer to $750,000.