The numbers of COVID-19 cases around the world continue to climb, and so does the economic impact. Some businesses have been severely impacted, even being forced to shut their doors. Others in essential services categories are performing well, but are also dealing with increased uncertainty. The federal government has even stepped in with stimulus packages to save jobs and boost the economy. But what does it mean for merger and acquisition (M&A) activity? While no one can be sure, here are some observations about what may be coming in the near future.
What’s the Deal?
Not surprisingly, a number of deals that were being contemplated have been temporarily shelved as a result of COVID-19 concerns. Often the stumbling block is the perceived difference between buyer and seller on the short term versus long term outlook for the business. However, at the same time many active deals are progressing and the transactions are proceeding as normal.
During the coming months, we actually expect there will be an increase in deal activity from opportunistic buyers. Some buyers will be assessing the opportunities that may exist to purchase struggling businesses while their valuations could be seen as being at a discount.
What About Risk?
With the onset of this pandemic, businesses are confronting a new level of risk beyond what they are used to. Contracts are being changed to make sure to deal with the possible fallout of the virus in legal terms – known as material adverse change (MAC) clauses. For this reason and others, ensuring adequate insurance coverage across the business is even more important than ever.
The uncertainty in the economy is constraining access to debt capital markets. This may result in the delay of highly leveraged buyouts. Moreover, it may negatively impact the liquidity of businesses who were already under financial strain.
What About Employees?
Obviously COVID-19 is having a tremendous impact on employees. As a result, expect the due diligence phase of any transaction to concentrate even more than normal on employee retention, especially of key management personnel. Buying a business that doesn’t include the institutional memory and in-house capability of long-term employees will obviously be a challenge that can impact profitability going forward.
The impacts of COVID-19 are far beyond the details of mergers and acquisitions. There are real people out there suffering real consequences as a result of the pandemic. At CGK Business Sales, we can’t help much with that, beyond our thoughts and prayers that you all stay safe and healthy. But we also know that business continues, and business sales continue, and we can help with that. Please let us know if you have any questions or want to discuss selling your business. A confidential phone call to our San Antonio office (or any of our locations nationwide) is the way to start. We hope to talk to you soon.