M&A today is much different than just a month ago. Unlike the 2008 recession, which was caused by subprime mortgages, today’s pandemic is the cause of the financial downturn and potential crisis. Another significant difference is that after the 2008 recession, only major corporations received government assistance, whereas today, the SBA is offering a Paycheck Protection Program (PPP) which should be a godsend to the restarting of most businesses. We recommend that all our clients who qualify apply for this program.
If this crisis if remains short-term, M&A should bounce back quickly for businesses whose earnings return to normalized levels on a month-to-month basis. A full year of normalized earnings shouldn’t be necessary to establish a business’s true value. This is an unprecedented, extraordinary event that may require carving out a few dead months of losses from one’s financials. Businesses that have not been impacted negatively by the epidemic should move forward to sell once there is clarity in the marketplace.
As in 2008, there will be buyers looking for good underperforming businesses to buy. However, sellers may not want to sell if the value of their business remains low after business-as-usual returns.
The Current Landscape
Prior to March, we saw a lot of M&A activity, high valuations and plenty of options to get transactions financed. Interest rates and capital gains tax rates have been lower than historical levels. Currently, however, most of the ongoing M&A transactions that we are involved with are either being slow-played or on hold until we have more clarity. While a few LOI’s have been cancelled, a few deals are moving through due diligence. We are recommending to our clients who are ready to sell and have not been impacted by the crisis to wait until the M&A market opens up again before we go to market.
We see private equity group activity has slowed, too. They appear to be focusing more on their portfolio companies and making sure that their businesses have plenty of liquidity. They are addressing supply chain issues from abroad and making sure their employees are being taken care of appropriately. We are receiving some requests to look at transactions, but it’s casual. Some PE firms are offering financing options for those businesses that were doing well prior to the crisis if their EBITDA was in excess of $3M.
In the financing sector, there remain options for financing, but we do see that banks have curtailed their appetite on new loans without a greater cash infusion and more collateral from buyers. The SBA has been offering guaranteed loans with only 10% down, which today seems risky for lenders. The biggest issue with most parties in the transaction business is the unknown. If we can come out of the crisis in the next 30 to 60 days most should feel comfortable enough that most businesses will weather the storm. But if the crisis drags on months further with little clarity, it will be an entirely different experience.
Preparing for Selling Post Crisis
We recommend that business owners continue to focus on driving company earnings and prepare timely monthly financial statements for their businesses. Be sure to isolate expenses specifically associated with the crisis, regardless of whether your business was hurt from the pandemic. When the market comes out of this crisis, these extraordinary expenses can be recasted out of the adjusted earnings. And if the business has just a few months of extraordinary negative activity, the months of sales and earnings can be removed from the trailing twelve-month income statement and annualized or reconstructed in a logical manner to satisfy a buyer.
Employees are one of the most important assets of a business and buyers will rely heavily on maintaining them in a business purchase. Take care of employees and make certain they execute non-disclosure and non-solicitation agreements. Non-compete agreements should be in place with key employees. These documents should be assignable to your successors and assignees.
As part of due diligence, buyers will now want to a review the process businesses put into place to manage this crisis. As you are experiencing your business challenges, document what is working, what did not work and the best way to address a crisis for next time around. Businesses that have maintained or thrived in this crisis will become in more demand and will command a higher valuation going forward. Businesses that haven’t done well will most likely be tarnished for some time, receive less interest from buyers, or receive a lower valuation.
We Have an Optimistic Outlook
Once the dust settles and business is closer to normal, we expect M&A activity to pick up substantially. Owners who survived the 2008 recession and now endured the current one may be ready to sell to avoid the risk of a future crisis.
If you’re curious about the M&A selling process, business valuations pre- or post-crisis, or would like assistance on exit planning for your business please contact us. Our team at O’Keeffe & O’Malley has decades of M&A experience and will answer your questions and explore your options with you. Contact us or give us a call at 913.648.0185 or email us at [email protected] for a confidential call or Zoom meeting.