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.