06 Dec M&A in a Pandemic
The Covid-19 pandemic has caused global turmoil, socially and economically. Companies have faced unprecedented changes in customer needs, revenue cycles, and staffing models. Throughout 2020 there has been uncertainty about company sustainability, customer demand, availability of capital, and the logistical challenges brought about by social distancing and virtual work environments.
Despite these challenges, entrepreneurs continue to innovate and deliver on customer needs. Like our clients, M&A professionals have had to adapt. The following is an overview of some of the repercussions we have seen in the markets we serve and what we and our clients have done to overcome them.
- Earnings – Companies that have demonstrated sustainable earnings and growth through the pandemic are in high demand. Covid-19 has been an effective stress test for company management and business models. Highlighting company success and prudent management during these times has drawn buyer interest and has increased buyer willingness to pay top dollar.
- Recurring Revenue – During economic uncertainty, dependable recurring revenue, such as SaaS and technology-enabled services, is like a warm blanket on a cold day. Companies that have found a way to obtain predictable recurring revenue from their products and services are seeing above-average valuations. Customer ‘stickiness’ is an important consideration as well. If customers continue to use and pay for a company’s products/services through economic troughs, then buyers will see the value.
- Demand for Technology-Enabled Products/Services – It is now a virtual world. Online shopping and virtual workplaces were already a trend before the pandemic; they became a necessity during social distancing. Companies have found a way to make lemonade from the lemons of the pandemic by reducing operating costs (office space, travel costs) and launching new products/services to support life in a virtual world (e.g., telemedicine, virtual workspace collaboration, IOT). All indications are that these trends will continue, even when the pandemic is conquered. Savvy buyers are rewarding opportunistic company management with higher valuations.
- Staffing models – Support for telecommuting and remote workers was already rising in companies across the country. The pandemic forced companies and government agencies to permit staff to work from home if their job function allowed. Technology and workflow investments have allowed organizations to maintain productivity with a distributed workforce. Having implemented virtual workforce support, companies can now capitalize on that by recruiting from a broader geographic area and from a more diverse candidate pool, which has the potential to reduce staff costs and allows them to be more competitive in recruiting and retaining the best workers. For well-run firms, a virtualized workforce can translate into an improved bottom line.
- Buyer’s Access to Capital – Capital is still available to grow and acquire companies, however there was a short-term disruption in bank-financed transactions during 2Q and 3Q 2020 due to the overwhelming number of government-backed PPP and MSLP loans that banks were processing. Buyers relying on SBA loans were particularly hard-hit, with many transactions delayed or canceled due to the backlogs at the banks. Private equity buyers with direct access to funds had an advantage during this period. New stimulus programs are still under discussion as we write this article (December 2020) and the impact on banks in 2021 is unclear. However, we are optimistic that capital will be available to buyers who want to close transactions involving target companies with solid financial performance through the pandemic.
- Due Diligence – In evaluating potential acquisitions, buyers have had to adapt, both in what they are reviewing and how they are reviewing. Regarding the “what,” buyers are laser-focused on financial results through the pandemic. Continued growth, revenue, and profitability are being scrutinized even more closely than normal. Customer churn is also a key indicator of business quality and sustainability, both during the pandemic and during a potential recession should one be triggered by the pandemic. Regarding the “how”, virtual data rooms (VDR) are now the norm and buyers are doing most (if not all) of the due diligence remotely. Video conferences have replaced travel and face-to-face meetings during due diligence. Secure VDR and video conferencing facilities are now a requirement for M&A Advisors.
At this time (early December 2020), several vaccines have been developed and are nearing deployment to the public. It is unclear whether life will return to ‘normal’ in 2021 or if there will be ongoing societal challenges due to Covid-19, however, it seems clear that virtual working, online shopping, and the industries and lifestyle changes that those trends support will continue to grow in a post-Covid-19 world. As always, entrepreneurs will innovate to find solutions to the problems and opportunities that life presents.
The Austin Dale Group has many years of experience running, growing, and conducting M&A transactions for technology and healthcare companies. We would be happy to talk with you about ways to achieve the most value in your business and accomplish your transaction goals, whether you are selling or buying.