The COVID-19 pandemic has touched every single part of the economy, including — or especially — sales. Businesses have seen existing customers delay reordering and new customers wait to make their first purchases, and some companies are holding onto cash rather than investing in their business. But their singular focus on the here and now has likely blinded them to how different their businesses and sales processes will look in the future.
Every business is different, of course, and each company must grapple with its unique challenges. Many nonessential businesses were forced to cease or limit operations, and they have suffered deeply as a result. Case in point: Retail sales dipped by 16.4% in April due to widespread stay-at-home orders that shuttered bars, restaurants, and many stores.
Some companies are in a holding pattern because they don’t know the extent to which they have been disrupted; others have experienced deep losses. As an example, auto industry sales dropped by 36.6% between March and April of this year. Sales will return at some point, but it’s unclear when or to what degree. Meanwhile, other businesses have benefited from the pandemic because they provide products and services that have soared in demand: Walmart’s online sales increased by 74% — and its revenue grew by nearly 9% — while grocery, delivery, and online conferencing companies also thrived.
In short, COVID-19 has affected everyone’s sales in some way (either positively or negatively). And those numbers will naturally influence mergers and acquisitions (M&A) decisions for a long time to come.
PE And M&A Deals in a Post-Pandemic World
Unsurprisingly, M&A deals declined during the pandemic. What activity there has been concentrated largely around acquisitions, as solid companies sought to purchase businesses unlikely to survive the downturn, according to Boston Consulting Group. In April alone, private equity (PE) deals decreased by 64% compared with April 2019.
But what will the PE and M&A landscape look like post-coronavirus? PE and M&A firms will show some sympathy when looking at businesses’ 2020 sales numbers, including earnings before interest, taxes, and amortization (EBITA). They know this year threw companies unprecedented challenges and that almost nobody will come through the pandemic unscathed.
However, this sympathy can only go so far. Ultimately, PE and M&A firms must assign businesses proper valuations and understand where these organizations are headed. Is a company’s upward sales trend permanently disrupted, or will it quickly recover once people return to work? Will the business be at pre-pandemic levels by the end of 2020? If not, how long will it take the leadership team to fight their way back?
Deal benchmarks aren’t likely to change much, but the context through which they’re viewed has evolved. Even allowing for COVID-19 anomalies, sales projections may look very different now than they did even a few months ago because companies are operating in a changing economy.
That’s not to say a struggling business can’t attract a PE or M&A firm’s interest in a deal. But the offer may be diminished from what it might have been, or the deal may be put on hold until the company’s performance recovers.
Evaluating Sales in a New World
It’s important for firms to think clearly about how to assess sales performance going forward. It may not be helpful to factor the worst months of the crisis too heavily into a company’s projections. What you need to know is whether a sales drop was a pandemic-related anomaly or the continuation of a trend that began well before the downturn. As the economy picks up, you’ll want to look at whether the company regains momentum or is still mired in lagging sales.
But you’ll have to dig deeper to understand not only whether sales will increase but also whether the business remains sustainable. The following questions will help in that sales performance assessment:
1. When will EBITA numbers return to — or surpass — pre-pandemic levels?
Use information from sales reports. If a business has yet to reach its pre-pandemic revenue and EBITA levels, consider whether it will ever get back there. How long might it take, and what will be the new run rate? Look, too, at what type of growth is realistic. You need to know if it can ever fulfill its previous forecasts.
The sales team will play a crucial role in accelerating recovery and growth, so inquire about what it is doing to drive the numbers back up. Start by examining the current sales pipeline, given how predictive that can be for future sales. You must consider where those prospects are in the sales process so that you understand the timing of that revenue.
2. Does the sales strategy need to change post-coronavirus?
Following on the previous point, assess whether a business’s sales efforts need to change in light of the new circumstances. Should the company focus on larger or smaller accounts than it did in the past? Should it invest in new products that are more relevant in the context of the virus? If sales team members will return to business as usual, how do they know their strategies still apply? And if changes are necessary, how have salespeople tweaked their customer and client targets and go-to-market strategies for new products? Asking these questions will provide insight into how deeply the company’s leadership has analyzed its new position in the market.
3. Does the company have enough qualified staff for a successful sales pivot?
If a company plans to change sales tactics, it needs to ensure it has the appropriate sales leadership and sales representatives to implement those changes. Make sure that the business has retained the requisite number of team members and that they have the right skills for the company’s next act.
If the company previously focused on small businesses, for instance, is the sales team prepared to sell to larger, more complex organizations? The business may need to invest in retraining sales personnel — or potentially hiring new salespeople — before it can pursue new target clients.
4. Is the sales leadership team capable of the challenges ahead?
In addition to having the right people on the sales team, companies need the right sales leaders. You need sales leaders who can take the sales organization toward a new set of goals. The current leadership team might be ready to handle the stress and challenges of change, or they might be only suited to stable, easier economies. If they can’t adapt to the new normal, you may want to discuss replacing them as part of the deal.
5. Can the company survive the recession?
Looking beyond the immediate crisis, businesses need to prepare to survive the current recession. It’s unclear how long a full economic recovery will take, though it could be many months or years. The organizations likely to survive are the ones that define a clear sales contingency plan that enables them to survive COVID-19 and prosper during the recession.
Sales growth during these interesting times requires that PE and M&A firms — as well as the companies they are targeting — have a realistic understanding of what it will take to succeed in this volatile environment. Adaptability and a keen understanding of the changing market will determine who thrives and who struggles.