Business advisors are digging in right now, trying to figure out how COVID-19 will affect their clients. We’ve been talking with business owners, active buyers, and other advisors around the country.
Right now, we know that some M&A deals are getting delayed over routine process points. Certain bank approvals that used to happen in regular in-person review meetings are being held up as discussions take place via email chain instead, buyers unable to travel, and key government approvals piling up.
Businesses with real estate transitions are not always able to get appraisers or environmental assessors out to their property. This is a standard part of the process, and if it can’t happen, the rest of the transaction is stalled.
Of course, some deals are getting pushed out over more than procedural issues. Certain businesses, for example travel or hospitality or key vendors to those industries, are getting beat up right now and may wish to wait until conditions normalize.
However, other business owners are unaffected, as of yet, and moving forward with plans to sell in 2020. We are still having conversations with potential sellers and prepping businesses for market. The key will be to mutually agree on when it makes sense to take actually “go to market” with each specific client.
We know that many companies and private equity firms have been doing well for years. The private equity industry alone had $1.5 trillion of “dry powder,” that is capital to invest, at the start of the year. They still need to honor their commitments to investors and put that money to work.
We are hearing that some buyers are putting all equity into deals right now. They’ll refinance later when things calm down, rather than wait on bank approvals to get things done.
This is a sign of the times. The market has been very active up until mid-March, and many buyers are still moving forward. In fact, some are getting more aggressive because they think they might find a better deal in the months ahead.
The question on everyone’s minds: Are sellers going to take a reduction in business value?
Imagine your company manufactured sanitizer wipes and was already in active negotiations with a buyer when the pandemic started. EBITDA is going through the roof with numbers unlike anything your business has seen before. Will the buyer adjust the price up because of the extra cash flow, based on this one-time anomaly? My guess is no.
Thus, the real question is: Will buyers get away with asking sellers to take a haircut over a one-time dip? Perhaps a bit, but maybe not. More likely, we’ll see a shift in deal structures. Buyers will put in less cash at close, with slightly more hinging on earn-outs or other contingencies based on future performance.
Given the competition in the market just a month or two ago, buyers will need to be cautious about pressing sellers for a bargain. The underlying, long-term value of most companies will remain the same, despite a temporary dip in cash flow. Savvy buyers understand this and will be judicious in their valuations.
If your business has been affected, and you still have slow times ahead, look at this as an opportunity to catch up on all the things you didn’t have time for before. Spring clean, if you’re allowed to be on site.
Document business processes. A business is more saleable, and will typically sell for more money, when there’s less risk involved. A business is less risky when all systems and procedures are written on paper instead of residing in the owner’s mind.
Identify different ways to train and/or grow your employees during this time. Online training, expanded team conference calls to discuss things like process improvements or strategic planning, and even cross-training are all options.
Right now, where ever your business is, identify and focus on ways your business can grow from the situation. Complete this sentence: The challenges we face today will help our business be __________. [The answer may simply be: more valuable.]