COVID-19 has presented a multitude of challenges, especially as it relates to private equity investment. The pandemic has forced us to look at transactions and business operations in general, with a more critical eye. One could argue, however, that history repeats itself, and we should have been doing this all along.
Challenges will continue to present themselves, and from challenges, opportunities will arise to make businesses more agile, flexible, and robust. Below are common themes we’ve heard from business partners, buyers, and sellers.
- One of the main challenges is the inability of potential investors to meet management teams face-to-face. There is plenty of cash to invest; however, money is being put to work more slowly, resulting in pent-up demand for investment opportunities.
- While it has been a seller’s market for a while now, valuations are increasingly becoming more conservative, and agreement on price is where most deals are getting bogged down. Deals are repriced due to valuations not supported by updated forecasts due to the impact of the pandemic.
- From the perspective of current owners, deals may require more skin in the game to share in the risk, including more extended earn-out provisions and more stock for stock transactions.
- Potential buyers are looking to protect themselves against losses arising out of COVID-19. As a result, representations and warranties insurance and material adverse effect clauses are evolving in real-time. Greater scrutiny and emphasis are placed on fundamental operational matters such as relationships with key suppliers and customers.
- While the ability of face-to-face meetings has declined, it is an exciting time for those that have cash available to invest and are willing to be creative. While nothing can substitute face-to-face meetings with management, potential investors are taking full advantage of performing as many due diligence activities as possible and doing so remotely.
- EBITDA measures are volatile right now, thereby forcing owners and potential investors to find other ways to place value on the business. Utilizing metrics such as customer retention, number of new customers, and other vital measures will be paramount. Finding different ways to measure the quality of the business will result in a more diverse and robust M&A market.
- The need to share in the risk of transactions presents opportunities for increased collaboration between sellers and buyers.
- While potential buyers are looking to protect themselves in transactions, it is an excellent opportunity for potential sellers to examine all operations of the business and determine how best to address any deficiencies or areas of improvement. As 2008-2009 showed us, putting thought and planning around what may come next is crucial.
- Despite the current climate, buyers and sellers can still have a successful outcome if steadfast discipline and rigor are applied. Take your time to find the right partners for a potential transaction.
- Be prepared for an increased, more robust due diligence process, thereby potentially lengthening the process.
- Consider those activities that can be performed remotely and still be done effectively to keep the process moving.
- Be aware that deals will likely require additional equity and structure.
- Be proactive in forecasting earlier in the deal versus later in the process to determine potential impacts of COVID-19. Look at how COVID-19 effects every aspect of the business – suppliers, clients, etc. Examine how the business has been impacted by the first wave of COVID-19 and determine how subsequent waves may affect the business.
- Don’t dismiss the impact on the people involved – to include not only the management team but other employees and clients as well.
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