There is no doubt about it, merger and acquisition (M&A) activity is starting to rebound from the significant decline experienced at the beginning of the pandemic. Deals are once again getting done albeit at a slower pace than anticipated at the beginning of the year. But things are different now, which means that owners who are looking to sell need to prepare their businesses and themselves for the new normal in M&A.
A recent brief CATALYST // Exploring opportunities – M&A Back but different from Herbert Smith Freehills LLP looks at how M&A has changed in light of the pandemic and some of the issues that those looking to undertake M&A in the coming months should consider. Here are some of their key insights:
- Distressed business sales are on the rise as activity picks up, but government support packages such as furlough schemes and moratoria on creditor proceedings have kept the numbers lower than anticipated.
- There are also many “quasi-distressed” deals, where companies need to dispose of assets to support their core business, but are not on the verge of insolvency.
- “Business as usual” M&A activity is picking up, including deals which were paused as the pandemic took hold. Governments are also participating in M&A, with a view to boosting their economies or protecting skills and jobs.
- Private equity and other financial buyers also have ramped up their activity in the marketplace.
The New Normal in M&A
Through a number of conversations with our broker colleagues and recent reports, these are just some of the ways the M&A process has and will continue to change:
Due diligence delays and issues:
Due diligence is going to take longer and be more rigorous than prior to the pandemic. Buyers will want to know all things cash flow for their targets – what it was before, what it is now, and what it’s projected to be going forward. For buyers, the businesses that are worth buying are those that are scalable and can produce ever-increasing cash flow.
Business value variabilities:
Buyers are watching closely to see the effects of the pandemic and financial crisis on the value of their acquisition targets. Acquirers have resorted to using alternative valuation methods to assess earnings as it’s still challenging to accurately value assets during the COVID-19 era.
Time to Act
The full impact of the virus on M&A is still playing out. As we know, there is still a lot of uncertainty related to a second wave of the virus, future shutdowns, stimulus money, etc. for both business owners and buyers.
“Firms will need to adjust, adapt, and innovate if they hope to surmount these issues and complete transactions,” posits a Pitchbook report, and we couldn’t agree more. Now, more than ever, owners need to be prepared and put their companies in the best possible light. High-quality, profitable businesses and prepared owners will be well positioned to exit and achieve their goals as the market continues to recover.
Baby Boomer business owners who have been holding on may be affected the most. Biz Buy Sell’s Second Quarter Insight Report suggests that: “COVID-19 has served as a wake-up call for Baby Boomers…” and “we’ve barely scratched the surface of Baby Boomer supply and as the pandemic continues, any increase in uncertainty will propel these owners into the market.”
However, without planning in advance, these owners are unlikely to be able to extract the maximum value for the businesses they have spent their lives building.
Make Sure You’re Prepared
As you work to regain business value you may have lost, now is a perfect time to position the business and yourself for a successful exit when the economy rebounds.