The COVID crisis has created a buyer’s market. It’s also demanding that companies reinvent themselves to adapt to changing times. This disruptive pandemic will affect the M&A process whether you are buying or selling. Here’s what you need to know to weather the storm.
A Buyer’s Market
The pandemic has put numerous transactions on hold. A long-time seller’s market may finally become a buyer’s market. For this and many other reasons, many companies will not survive the crisis. In one study, 36 percent of respondents said revenues had dropped by 70 percent or more since the pandemic began, and 13 percent were considering bankruptcy or closing.
Among those that survive, a large share will have owners nearing retirement. The shift to a buyer’s market will push valuations downward. Some businesses, however, may use the downturn as a chance to pivot and revamp, growing value and perhaps even profiting from the crisis.
When businesses have to close during the shutdown, what happens next may depend on what they do during the shutdown. Are they able to emerge more versatile? Have they found new revenue streams? If not, they’re in trouble.
Fire Sales Begin
Sellers should expect to encounter more buyers than ever before, especially if the company is losing money. Some will be the sort of buyers who prey on naive owners and struggling companies. The good news is that there is also still plenty of capital in the private equity world, opening the door to PE buyers. These buyers may be more risk averse than ever before, and will have plenty of questions about projections and cash flows.
While some buyers may take advantage of unsavvy owners, the issue cuts both ways. Buyers who think they have found a good deal must do their homework. Consider why the business has failed. Can it recover? Is the problem the owner, and if so, will a new owner be able to fix it? Where is the industry right now?
Consider what your cash flow will be. How much working capital will you need now, as opposed to prior to COVID. Sustainability can also be a concern. Consider how the business will survive a recession, and what costs you’ll likely incur keeping it alive. No one can predict the future, but a little critical thinking can help you make sound assessments.
Stay or Leave?
If you’re an owner contemplating an exit, the process begins with a reliable valuation. Many owners simply have unrealistic expectations about business value, particularly amid a pandemic when value may decline. It’s hard to see your business through a less-than-rosy lens.
Consider how your company looks to a buyer. What are its key sources of value, and what can you do to grow those value drivers? Can you stick around a little longer to grow more value? Or do you need to get out now to preserve what little value is left? In either scenario, expert advice from an M&A advisor or investment banker is key.