How has the Coronavirus impacted merger and acquisition activities?

Let break this into two sections—buyers and sellers:

Buyers

Is this a good time to be acquiring a business?

While there is significant  uncertainty in today’s business arena, Federal and state governments have demonstrated a great appetite to fund businesses and employees to keep the economy from further sliding into the unknown.

What about financing?

Interest rates are at historically low rates. If you are comfortable with a certain level of debt, it might be a good time to borrow for strategic acquisitions.

What about alternative financing?

Many private equity funds have become aggressive in “partnering” with companies looking to make acquisitions or management teams  with industry and operational knowledge seeking financial backing to buy out existing ownership.

Are risks heightened by the current environment?

Obviously, the risk is higher now with the cloud of uncertainty that did not exist two months ago. However, this may be a good time to find strategic targets. These targets may have a good core business, but for one reason or another, may be accelerated toward  a transaction.

Sellers

Is this a good time to be selling a business?

We are still receiving inquiries from private equity and investors, even during the COVID-19 pandemic, looking to acquire companies as a platform or add-on business. However, the market is risk adjusting. Investors are asking what impact COVID 19 will have on their business and if there is a recovery period, how long will it last? Additionally, many acquirers who either have been on the sideline or not aggressively looking for acquisitions, might now believe there are “deals to be had” and this may increase the pool of potential buyers.

Regardless of whether or not your business has been negatively impacted by the recent events one fact remains, no two companies or transactions will be the same. Each company will have a unique story to tell the market.

If you are facing or approaching a distressed scenario, it may be beneficial to evaluate your company with a segmented approach.  If there is more than one service or product line within your company, there may be more than one buyer.

If there is no buyer for your business or customer list, you may be faced with selling the assets of your company.  If this is where you are, proceed with caution when approached by a buyer for your best/highest value assets.  Selling the best pieces of equipment may render the remaining equipment value zero.  It is best to evaluate assets as a total package before individually selling off pieces of equipment or other assets.

What should I be doing on the operations side to be ready for a potential sale?

This situation emphasizes the need for diversification of suppliers and customers. This business climate will put pressure on all businesses and if key or major suppliers or customers do not make it through this time, it will clearly impact your operations (and decrease the value).

It is also a good time to look at marginal lines of products or even locations. If cutbacks are warranted, eliminating these areas might ultimately increase the value of the business.

If I need to sell quickly, what should I do?

Unfortunately, this is not a good place to be. If you can hang on until this pandemic passes (hopefully quickly), you will be in a much better bargaining position. We have a saying, ”one buyer is no buyer,” so if you absolutely must sell, try to arrange for multiple potential buyers verses taking the first deal that comes along.

What will be the impact of these uncertain times on business value/multiples?

Anytime there is in increase in risk, multiples become lower. Remember the inverse relationship–as risk increases, multiples decrease.

How your business performs during this time of uncertainty will have a significant impact on the value or multiples. Focus on maintaining consistent margins during a downturn in revenue. 

If sales are dropping, are expenses being managed to the same scale? This will show a prospective buyer that your company is nimble during times of uncertainty. If staff is being downsized, are the remaining employees capable of wearing multiple hats to keep all plates spinning within the organization? Employees willing to band together during a difficult time reflects commitment to the organization to a prospective buyer.

One fact remains the same – there are unprecedented sums of money in the market looking for an investment. The better your company weathers this storm, the higher the multiple you will command when the clouds lift.

This article contains just a few reflections on value during these uncertain times. If you have questions or would like to discuss strategy for your company, please give us a call or email us at COVIDCORP@mcmcpa.com.

Nothing in this document should be construed as providing tax advice.  Please consult with your own professional tax advisor.  In addition, this document represents the information that we have up to the date the presentation was made and cannot be relied upon for additional updates beyond that date.