How COVID-19 Is Affecting Your Exit PlanBy Dannell R. Lyne | May 14, 2020
For owners who are contemplating, planning or executing an exit plan, various factors must be considered to ensure an equitable deal is possible during these trying times. As owners may put off exiting a business until the environment improves, current negotiations may be delayed, terms changed at the last minute by potential buyers or the exit payout may change in the interim. We will look at a couple of these scenarios.
Contemplating an Exit
Owners who were contemplating or working on an exit plan before this pandemic have to be prepared to reassess their plan if they want to move forward. They must ask themselves if this crisis will increase or decrease the number of potential buyers. Several private equity firms have recently announced that as a result of the current environment, they intend to ramp up investing, but the intent is to find companies that have devalued since the pandemic. Another thing to consider is changing the desired time to initiate the exit.
Consider this example of what could happen while negotiating an exit plan during the pandemic. An owner of a chain of fast food restaurants and his parents have been in negotiations since the beginning of the year to sell the chain of restaurants. The sale represents the parents’ exit plan to retire and allow their son to explore other opportunities. Since the stay-at-home orders have been in place, negotiations begin to stall and the owner receives an email from the buyer’s accountant questioning the viability of the fast food restaurant business going forward, specifically asking if in-person dining arrangements will change. Even if they don’t change, will customers still frequent such establishments? Companies are finding that they do not need all the office space they have been paying for since remote working has been just as effective. Taking all these factors into consideration (i.e., uncertainty, initial buyer loss, further general and administrative expenses and HVAC repairs), the consummation of the deal at the original agreed upon price is unlikely.
Clearly the buyer is using the pandemic during negotiations to drive down the sales price and get a better deal at the expense of the sellers. However, this is an issue where COVID-19 comes into play during current negotiations. Is the company/business still worth the agreed upon sales price prior to the “outbreak” and will it regain its value once things return to normal or close to normal? This is something to consider on an industry-by-industry basis, because based on what we have seen so far in states that have started to reopen, some businesses have immediately bounced back, such as barbershops and hair and nail salons, while others, such as restaurants, are being forced to gradually reopen at 25 percent capacity or offer only outside seating.
Another area to consider as a result of COVID-19 is whether the buyer is still able to make what would be considered a strong offer from the seller’s standpoint. That could lead to a low-ball offer in the hope that the seller is in a desperate position to continue with their existing plan and sell. Alternatively, the seller could use the current situation as an opportunity to reduce the amount of a previous offer on the table. Moves like this could lead to a moratorium on the negotiations or force the seller to walk away from the deal and wait to return to a sense of normalcy before engaging in an exit plan once again.
Receiving Buy-Out Payment
If an individual is currently receiving payments as a part of an existing strategy, COVID-19 can also affect his or her income stream for a period of time. In addition to salary reductions, layoffs and furloughs to reduce payroll, companies are looking at payments to former owners to save additional funds, requesting that they take reduced payments or delay payments until the economy recovers and payments can resume at the normal rate as previously determined.
If you have any questions or would like additional information, please contact your Marks Paneth advisor.
About Dannell R. Lyne
Dannell R. Lyne, CPA, MST, is a Partner in the Private Client Services Group at Marks Paneth LLP. To this role, he brings extensive experience in tax planning and compliance for family owned businesses, nonprofit organizations, alternative investment funds and high-net-worth individuals – specifically executives in the financial services industry, investment partnerships and international matters. Prior to joining Marks Paneth, Mr. Lyne was a Partner with Dylewsky, Goldberg & Brenner, LLC – a Connecticut-based, full service... READ MORE +