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Going into 2020, one of the themes for the mergers and acquisitions (M&A) was uncertainty. Slow economic growth and geopolitical tensions weighed on the minds of economists and business owners, with the threat of a potential recession being mentioned in some of the more pessimistic forecasts. Against that backdrop, there were still record low interest rates and dry powder looking to be invested in the right opportunities. The 2019 North American M&A Report produced by PitchBook reported a slight decrease in total North American deal volumes from 2018, but the pricing multiples were still at an all-time high. Buyers were becoming more cautious in evaluating deals, but they were still willing to pay a premium for the right opportunities.
Fast-forward nine months and the theme of uncertainty has become even more poignant as we are in the midst of a pandemic, endured one lock-down with the potential for another, have seen world-wide government relief programs of a previously unimaginable magnitude and experiencing a transformation of societal norms. This uncertainty has further magnified the M&A trend that we were seeing at the end of 2019. PitchBook’s Q2 2020 North American M&A Report reported a significant drop in deal volume; however, pricing multiples held steady.
Although PitchBook’s study is based on deals across North America, the underlying trends are similar to what we have been witnessing in our own practice.
For the deals that closed in 2020, we did not experience a decrease in price due to COVID-19. These deals all had similar attributes that made them attractive to purchasers, despite the market uncertainty due to:
On the other end of the spectrum, we were also involved with deals that were paused or cancelled due to COVID-19. These deals also had similar attributes due to:
We are seeing that there is still strong demand and pricing for well-run, profitable businesses. In this time of uncertainty, purchasers are willing to pay a premium for what they perceive to be a safe and stable investment. For these businesses, the negotiating leverage is held by the business owner.
For businesses that are not in this category, we are starting to see two different dynamics play out. The first is business owners taking the wait-and-see approach. Purchasers are not willing to pay the pre-COVID-19 prices for these businesses, and business owners are not willing to take a discount on pre-COVID-19 prices. Often times, these are businesses that have seen a drop in revenue and profitability due to COVID-19, but they are still profitable with the help of the government relief programs and the business owner has the energy to keep going. Until there is more clarity on the future outlook of the business, deals in this category will remain on hold.
The second is business owners that are motivated to sell. Business owners in this category are willing to take a discount on pre-COVID-19 prices or accept earnouts to share some risk with the purchaser. Whether it is due to the financial situation of the business, or the energy level of the business owner, there is a desire to get a deal done. Purchasers in this category are willing to take a risk if they can get a good deal on a business that they believe can be turned around. For these businesses, the negotiating leverage is held by the purchaser.
While most business owners have been in the wait-and-see camp so far, we anticipate more business owners will be motivated to sell as COVID-19 continues to drag out and take an emotional toll on business owners.
If you are a business owner contemplating the sale of your business, it is time to reflect on which category you are in and ask yourself whether your profitability remained stable throughout COVID-19.
If so, you likely are in a position of strength when you decide to pursue a sale. Knowing that the demand is still high, consider if this is the right time to sell in order to capitalize on that strength.
Has your business suffered due to COVID-19? If so, what is your timeline for a sale?
If you have the energy and runway to ride out the storm, focus on transforming your business to be more attractive when you decide to sell.
If you do not think you will be able to ride it out, then consider selling sooner rather than later. The economy is still benefiting from unprecedented government spending and we have not yet witnessed a surge of business owners that are motivated to sell. If you think you need to sell before things recover, you want to sell before the market is flooded with other competing businesses for sale.