These are truly unprecedented times. Personal routines have been turned upside down. No travel. Gyms are closed. No eating out. No sports. Mergers and acquisitions (M&A) are also being severely impacted. Here are some of the ways business transactions are being impacted during the pandemic.
Establishing value is challenging for buyers and sellers. M&A transactions involving service businesses like debt collection agencies are commonly priced based on applying a multiple to adjusted or normalized earnings before interest, taxes, depreciation, and amortization (EBITDA) for the trailing twelve months. Buyers closely evaluate budgets and projections as well. The pandemic is creating a lot of uncertainty in a company’s performance and ability to complete a transaction. Most discussions during this crisis have been with buyers seeking salvage deals and sellers trying to determine whether they should wait it out or transact now.
Structuring M&A transactions during the pandemic is very challenging. It is too early to calculate the impact that quickly implemented work-from-home models will have on a company’s financial performance. Which costs are classified as one-time and which are recurring? Did productivity increase because long commutes were eliminated? Will it be sustainable as businesses reopen? These are just some of the new items directly impacting the ways transactions are being structured.
Some buyers are actively pursuing distressed companies to purchase. We are seeing increased interest in distressed deal making as opportunistic buyers see value in companies that have been especially hard hit by the Coronavirus. Cash deals, longer earnout periods, and seller financing will be needed in this environment as credit markets are tight.
Travel restrictions are impeding due diligence processes. Office lockdowns and travel restrictions have been slowing the due diligence process and, in some cases, have resulted in deals being postponed or even cancelled.
Attorney transaction hours will increase. If you think that lawyers were thorough before the global pandemic, they will now agonize over the wordings of each indemnity, representation, and warranty. In deals that were inked before the outbreak, some of the negotiated reps and warrantee clauses do not hold true anymore. A target company’s financials may look very different now and going forward.
When will conferences return to normal? I miss the excitement of attending a tradeshow or conference, dressing up in nice clothes, three breakfast meetings before 10:00am, random discussions in the hallways and bars, scheduled meetings throughout the day, and overpriced dinners. Business buyers also attend conferences to meet with perspective sellers and take the temperature of an industry they are considering investing into.
Travel was hard before Coronavirus. What will it be like afterwards? I have not been in a plane for more than 2 months, a first in nearly 30 years of business travel. I don’t miss crowded TSA lines, being patted down by a complete stranger, nutritious airport meals on-the-go, tracking my Uber driver, and hotel lodging. Zoom is a nice alternative, but it does not replace the need for face-to-face meetings. New relationships are nearly impossible to establish virtually. Virtual data rooms already exist and accelerate diligence efforts, but they do not replace the need for human interactions. Business buyers use dinners to get to know the selling owners, tours to get to see the business with a full staff, and interactive management meetings to get to know the leadership team.
This is a short-term blip for many long-term investors. Many companies, financial sponsors, and capital providers were in strong financial shape before Coronavirus. They should be positioned to act quickly as the world recovers. The desire to make acquisitions still exists even during the pandemic. Most private equity groups are seeking platform and add-on transactions for their current portfolio, and some strategic buyers are actively seeking turnaround companies to purchase during the outbreak. Some deals are getting done. Most negotiations are taking a lot longer. Some buyers or sellers are in a holding pattern. Other transactions will be marketed once FEMA states that we are out of crisis-mode and travel restrictions are lifted.
We need to pay attention to mental health during this crisis. While this long period of isolation is necessary for public health, it could also have a detrimental impact on people’s mental well-being. Our mental health directly impacts how we handle stress, relate to others, and make critical decisions. M&A transactions are stressful for buyers and sellers alike during normal times. During a global pandemic, these factors are directly, and perhaps severely, impacted and should be closely monitored.
Kaulkin Ginsberg remains open for business during this pandemic. If you want to schedule a confidential call please email firstname.lastname@example.org.
About Kaulkin Ginsberg Company
Since 1991, Kaulkin Ginsberg Company has provided critical strategic advice to the outsourced business services industry. Our client-centric approach covers almost every stage of a company’s life cycle and enables us to maintain longstanding relationships as trusted advisors. We provide mergers and acquisition advisory, strategic consulting, valuation and financial solutions, market intelligence and analysis, as well as litigation support and expert witness.