M&A Covid Creativity

As we watch M&A activity rebound, it remains to be seen what kinds of impact the pandemic will have on deals. Companies that held their own or even thrived during the pandemic are certainly in demand due to performance. Companies that didn’t do as well may be in demand because they hold promise for the future or because buyers are looking for a deal.

Regardless of performance during 2020, buyers will want assurance that the future is bright, and may not be as willing to take on risk. The financial metric commonly used to measure profitability (EBITDA) has even been updated to EBITDAC, or Earnings Before Interest, Taxes, Depreciation, Amortization and Covid. Although this was initially introduced in jest, it has taken on serious meaning over the last several months and has proven that creative deal-making is becoming necessary.

Pre-pandemic, our goal was to get as much money up-front as possible for our clients; and in some situations that is still the case. However, if a business owner needs to prove to buyers that the business will continue on an upward trend or rebound from a downward trend, there are ways to structure a deal that limit risk for buyers and also have upside for the seller.

If the business is heavily dependent upon the owner, a buyer may ask the owner to stay on board with the business for a longer period of time than a customary transition period. Sellers can also limit risk for buyers and convey their confidence in the future of the business by retaining some equity in the business or by providing more owner financing to the buyer.

Earn-outs are commonly used to close the gap between how the buyer and seller value a business. In today’s climate, they may take on a much larger role in minimizing the buyer’s risk of acquiring a business in an uncertain environment.

While these types of solutions are considered tactics that may appease potential buyers, there is also benefit to sellers. For example, sellers can exit closer to their own timetable vs. having to wait until their businesses fully rebound from the effects of the pandemic. In addition, there are tax advantages to taking proceeds over time.

No one knows when the crisis will end or how business owners will project the future for their companies. What we do know is that buyers are becoming active again and that we must use all creative resources to put together deals that work for the buyer and seller.

If you have questions or would like to discuss how the pandemic has affected your business, contact our team at 913.648.0185 or michael@ok-om.com.