Insight One: Many Businesses Aren’t Built to Last
When the pandemic began to upend life in the west in early 2020, the effect on businesses initially took a back seat to uncertainties about our wellbeing. When it became clear the pandemic was going to drag out for many more months, businesses became a focus. The strength of the Canadian economy is, after all, predicated on small businesses, which means their long-term health directly or indirectly affects the wellbeing of every Canadian.
There was a surge in the number of small businesses that closed between March and June of 2020. According to estimates from Statistics Canada, over 300,000 closed compared to about 170,000 over the same period in 2019.
Thankfully in 2021, those numbers seem to have levelled out, back to something resembling 2019 levels, but many of the challenges of the pandemic persist. Purchasing habits have changed, perhaps indefinitely, as have consumer attitudes. The idea that small businesses can simply outlast the pandemic rather than try to adapt to it is no longer a feasible one.
The question now is: how to adapt? Market forces, differences in sectors make it difficult to answer this question in any kind of detail. A report like this can’t capture the nuances of the experience of a small logistics business (a sector that boomed during the pandemic) and a small bar (hospitality was devastated) during the last year and a half.
That said, the pandemic has revealed a series of fundamental principles that, with appropriate attention and investment, insulated small businesses across the board from the volatility of the market. Vulnerable businesses that failed on these fronts became more vulnerable, and businesses that were already positioned for success improved their position and enhanced their valuation.
The pandemic revealed the importance of these tenets, but the long-term viability of a business well depends on them regardless of the market conditions.
Many businesses are built rigidly, because fixed processes tend to ensure both consistency and quality. But that can become a business’ Achilles Heel if flexibility isn’t built in. If, for example, one of the business’ key processes is reliant on the owner and cannot be taught or passed off without compromising operations, that’s a problem. Or if the business is solely reliant on one type of customer whose needs or behaviour may change suddenly, that business is a brittle one. As the old proverb goes, if it doesn’t bend, it’ll break.
Perhaps the best example of agility during the pandemic is that of small bars and restaurants who transitioned to specialty grocery shops and takeout operations. The customers and their purchasing habits didn’t really change—there was still tremendous demand for restaurant-quality meals and specialty food and drink. But the circumstances did change. Many restaurants had to adapt their menus to offer the same quality dishes in a take-out friendly format. Drinks couldn’t be sold at the margins they were in-restaurant but they could be sold as bottles at a markup or as prefab cocktails.
Many small restaurants not only adapted but adapted so successfully that some are now reporting that they will remain with the grocer/takeout model even after the pandemic.
Fads and fashion shift very quickly, and there have been plenty of small businesses that have grown into empires on the backs of these movements. But empires are insulated by their size and resources. In some sense the McDonalds’s of the world are playing by a different set of rules than your local burger joint. The former can often hop in and capitalize on trends in a way that the latter, trying to build up their foundation, can’t.
For example, during the pandemic the need for hand sanitizer exploded. Manufacturers simply couldn’t keep up with demand and as a result a number of other businesses pivoted to help meet the need. But some saw a longer-term opportunity. But when demand sank back to pre-pandemic levels, the Purells of the world were virtually unaffected, while many of the smaller operations trying to establish a foothold fizzled out.
Now, that’s not to say those businesses were wrong in their assessment of the future opportunity. Instead, it’s more likely they were too reliant on that wave of pandemic-generated demand. When it crashed, they had nothing else to fall back on. But that’s not the case for all businesses.
One small GTA-based distillery, Last Straw, created a new formula for hand sanitizer during the initial wave of the pandemic to address mounting demand. It continued because the product, Ethisan, had a pertinent and marketable difference: it was made from only seven ingredients, all of them natural, Canadian sourced and Canadian made, including ultra-high quality food-grade ethanol (the active ingredient in hand sanitizers). As a result, the business has continued to expand, even after the initial demand of the pandemic has subsided.
There is absolutely no substitute for a well-run business, and the pandemic revealed that for many small businesses there were problems under the hood. Sloppy business practices can often slide by when times are good but under the pressure posed by the pandemic, many of these shortcomings came to the surface.
We at BuyAndSellABusiness.com know this because the other time these problems become obvious is during the sale of a small business. Many businesses who decided to try and sell during the pandemic faced obstacles because savvy buyers understood that they would have to fix those problems to ensure the business’ success during the pandemic and beyond.
We’ve discussed some of those issue in the past but, at a glance, some of the key ones relate to:
- Book keeping
Does the business know the value of its assets, have a strong sense of cash flow, and have a solid plan for keeping its debt under control? Governments offer a range of assistance options during the pandemic but a large number of small businesses weren’t in a position to confirm, apply, and then prove their eligibility because their books weren’t in order.
In difficult times, leadership can make or break a company, and the morale of the people who keep the company afloat is hugely dependent on culture and leadership. Even in less challenging times, it can be the difference between a business that coasts and a business that thrives.
Stay tuned for the next entry in this series where we’ll look at how to better utilize a listed business’ time on the market.
Opinions expressed here by Contributors are their own.
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