As has been evident for a few weeks, the global pandemic and resulting economic environment will change virtually every branch of business (not to mention most of our daily routines). With that said, it is too soon to tell if we will look at this as a defining moment that pushed us into a full-on recession, an overdue correction (given a previously historically long bull market), a simple flash in the pan, or one of the countless options in between.
We do know, however, that the situation we are currently facing is entirely different from any other downturn in recent history. It’s a reaction to something affecting the health and wellbeing of millions across the globe: the novel coronavirus. Business owners and prospective buyers are now digesting the information and reacting to the impact the outbreak will have on M&A this year.
At the moment, any positive news will send the markets up and any negative news will send the markets down. Unfortunately, nobody has a proven playbook on how to navigate this global health and financial crisis. We do know, it will require improvisation in order to survive this crisis and to accelerate towards an eventual recovery. In this article, we address key topics relating to how COVID-19 impacts private market transactions, current trends, and steps to take for small-to-medium sized business sellers and buyers.
How to Process Changes
The outbreak of COVID-19 has the potential to cause buyers and sellers to pause and rethink some of the fundamental aspects and flows of a transaction. The consequences are critical to most companies that are either in the market or thinking of going to market this year.
Closing Timelines- As a general rule of thumb, both parties (buyers & sellers) attempting to achieve a sale during these times should think through each step of the transaction and consider adjusting timelines and expectations due to the heightened challenges of doing a deal. If the plan is to proceed, it is important to remember your ‘North Star’- meaning, reaching a successful closing should take precedence over all the little bumps in the road.
Physical Meetups- Transaction participants should be aware that people aren’t travelling which may be difficult for everyone to physically ‘get together’. As a result, this can make due diligence and site visits more challenging. The good news is that we live in an era where we all have access to a plethora of tools that enable remote work. Tresle has always been a fully online platform that has allowed our clients to interact and communicate privately and securely. Tresle also provides an online workflow to get deals done. Other tools include video conferencing (FaceTime, Zoom, etc.) and virtual data rooms to help navigate this barrier. Now more than ever there is value in going digital as most people have a baseline experience using such tools and working remotely in a collaborative manner.
Due Diligence- Be mindful that extra time will be required to perform due diligence on a company’s customer list, internal systems, insurance, employees, among other things. Ensure you review the company’s key contractual arrangements and consider the presence of any force majeure clauses- it is important for both parties to know.
Financing- Transaction participants should consider whether the outbreak and its correlating market effects could postpone the delivery of key financial information which may, as a result, delay the availability of financing. Expectations and timelines should be adjusted accordingly.
Purchase Agreement Points- In relation to the above, certain purchase agreement points, such as financing, could be outside of everyone’s control and may, therefore, require some adjustments. Changes around the closing date or payment structure should not be ruled out.
Closing Logistics- Parties should think through contingency plans if temporary office closures (ex: government agencies, law offices) delay the last closing processes. Going through the specifics in advance can shelter against any unwanted surprises later on.
The Bright Side
Prior to the coronavirus pandemic, investors enjoyed a decade-long upward ride as the U.S. economy (and valuations) reached record highs. Specifically, there is an abundance of dry powder (i.e. cash) available for deployment. Further, buyers still find themselves in a very low-interest environment across all major financing sources. Once the initial shock of the pandemic wears off, it is believed buyers will again be hungry for acquisitions. Sophisticated investors recognize that market chaos breeds opportunity.
This is not to say that every company on the market will be undervalued and buyers will expect ‘a deal’. With every market disruption, some industries will drop, and others will thrive. Recent search data confirms that not every industry is losing. In fact, some industries are doing better than ever- these include, but are not limited to:
- Home Fitness
- E-Commerce
- Remote Working/Education Technology
- Healthcare (staffing, equipment)
- Delivery & Logistics
- Food Manufacturing & Wholesale
- Pharmaceuticals
- Cybersecurity
- Consumer Goods
...and myriad others in between. The point here is that it is important for business owners to know where their company stands and to recognize that many buyers are still very much active.
Taking the Right Steps
During any crisis, it is important to stay the course in order to come out in a good position on the other side. We recommend you follow these simple steps:
Patience. Nobody knows exactly how long this situation will last; and as mentioned above, adjustments will more than likely need to be made in terms of deal timelines. As such, patience is not only a virtue, it is a necessity.
Don’t Panic. Now is not the time to frantically run to market with a ‘fire-sale’ price. Buyers will look for price dips in the short term but in the long term, panic-selling doesn’t create value for either side as sophisticated investors buy with long term expectations. Carefully and calmly assess your situation to ensure you put your best foot forward.
Prepare. The old saying rings true: ‘failing to prepare is preparing to fail’. Whether buying or selling, create targets (with reasonable expectations) based on a strategic agenda. This will be a time where you’re going to see people differentiate themselves on how they deal with the crisis. Who steps up? Who shows leadership? Who ensures the purpose of what they are doing doesn’t get lost in the mix? Those will be the ones who excel in these times.
There is one more thing. One BIG thing, that we should all note: this will pass.