Plans for 2020 changed abruptly with the outbreak of the COVID-19 virus. Operations may be starting to return to normal, but questions around the lasting repercussions of the pandemic remain. This is particularly true if your plan had been to grow through strategic acquisitions or to sell your company. While the dust from the COVID-19 pandemic settles, the following considerations may help guide your company in its evaluation of future complex transactions.
Understand How Business Valuations May Be Affected
Financial market disruption following the COVID-19 pandemic creates a lot of grief with business valuation, because the traditional approach to business valuation involves market inputs. Past M&A deal making information will not be as useful, either, because of the unprecedented disruption brought on by the COVID-19 virus.
There are different valuation approaches to take that can paint a more representative picture of what a business may be worth during times of market disruption. Before you commit to a transaction, you may consider undergoing another valuation or reassessing past data to determine if additional valuation work may be useful. (For a more in-depth look at the valuation issue, see our report here).
Recognize That Deal Timelines May Be Different
Buyers and sellers that had started serious deal-making conversations can expect longer turn times for the transaction, at least in the near-term. Additional due diligence may be needed to understand how a target’s operations were impacted by the pandemic or if pandemic-related disruption may affect the buyer’s ability to finance the purchase. Management teams, boards, and other key stakeholders in the transaction may be generally more reticent to pull the trigger on deal terms given the uncertainty that still lies ahead. Federal stimulus measures continue to be discussed, and to the extent buyers or sellers have available liquidity, they may be more protective of those reserves while waiting to see how quickly the economy can get back to business as normal.
Anticipate How Disruption Could Affect Deal Structuring
Interest rates have been dropped to near record lows, and there are opportunities to restructure debt arrangements. At the same time, with so many companies forced to suspend parts of their operations, the ability to service existing arrangements also becomes a concern. The resulting disrupted debt market adds a wrinkle to deal structuring that both buyers and sellers should be mindful of when they re-evaluate their M&A plans. Lenders may be more particular before establishing new arrangements, and there may be additional risks involved.
Put Plans in Place to Maximize Future Value
Prior to the pandemic, we had record-breaking levels of dry powder in the private markets. Private equity and venture capitalists may still be looking to make strategic investments post-COVID, particularly if business values and interest rates have been slightly deflated by the COVID-19 repercussions. Businesses positioning themselves for sale can help make their organization more of an attractive target by retooling their approach to financial and key performance indicator (KPI) reporting. Be sure that your KPI and financial reporting provide real-time updates throughout your road to recovery so that management teams get the timely insights they need to know if their strategies are effective. If your organization is seeing significant changes to its cash flows, it may also want to move to a 13-week cash flow forecasting model.
Depending on the extent your organization’s cash flows were impacted by the pandemic and the success of federal stimulus efforts, recovery may be just around the corner. Organizations with M&A aspirations should be patient with the process and in the near-term, and focus efforts on what can be done to drive value internally, including implementing cost recovery strategies and taking advantage of favorable tax provisions that came from recent coronavirus relief legislation.
For More Information
For more information about how the COVID-19 pandemic affects your M&A strategy, contact us. Visit our COVID-19 Resource Center for more insights into the coronavirus’ impact on business operations.
Published on June 01, 2020