The unprecedented economic circumstances stemming from the COVID-19 pandemic are only beginning to be understood and will likely be felt for some time. In the M&A world, the events of 2008/2009 provide a playbook of sorts for navigating the current crisis and the months ahead. Business owners who are considering whether to reopen or sell should focus on liquidity as the lifeblood of their companies. While their businesses may be stable, any thoughts of exiting them in the near or medium term are almost certainly on hold for most businesses. Why? Because while successful M&A transactions may have numerous ingredients, two are essential: willing buyers and available financing.

Buyer’s choice

For the foreseeable future, business owners should expect buyers to remain on the sidelines in most industry sectors. Strategic acquirers are likely focused on conserving cash in an uncertain environment. Many private equity funds must first focus on the health of their existing investments. If those are stable, they may be looking at new investments, but expect an abundance of caution.

At the same time, the banking industry—an important traditional funding source for family business acquisitions—is helping customers cope with historic financial challenges with their participation in the Payment Protection Program, as well as creative loan restructuring. Sadly, the impact of COVID-19 will still involve outright business failures and significant loan write-offs. In either case, banks have massive amounts of work to do with respect to their existing customer bases, so it’s likely that their lending outlook will become more conservative for the foreseeable future. With reduced credit availability and fewer buyers, business owners should expect lower levels of deal volume and a decline in purchase multiples across most— but not all—industry sectors. On balance, giving the advantage to the buyers. 

What can prospective sellers do? 

In a dampened M&A market, forward-looking business owners who have stabilized their businesses have a unique opportunity to assess their current positions and chart new paths to their long-term goals. In military parlance, the M&A market is in a “tactical pause” for a while. How business owners take advantage of this opportunity is important. Statistics point to a change of perspective.

In the two quarters preceding the current crisis we have noted a staggering disconnect: 98% of business owners were highly confident they would meet their personal financial objectives, but only 31% of business owners believed their businesses were ready to be sold.* With many business owners using the proceeds from the sale to fund a comfortable retirement, these numbers could not be more stark. Even without the COVID-19 crisis, many business owners likely face a significant valuation gap.

Narrowing the valuation gap

While time will certainly help settle the valuation gap, there are other things to consider. Using the Great Recession as a guidepost (and recognizing that the economy was fundamentally stronger leading in to this crisis), it could be a couple of years before we return to a more balanced market. Rather than just marking time, business owners would be wise to examine their businesses to identify opportunities for improving operations and growing value. Doing so will help differentiate these companies as the M&A market picks up, as they may be better positioned, offering stronger profits and competitive advantages that can help drive premium multiples in a rising market. Closing the valuation gap would be a wise move.

In November 2008, many owners of family businesses were in a state of shock. They certainly saw the glass as half empty. Six months later, their views had changed. They had gotten their bearings and moved forward. They were beginning to see things as ‘glass half full.’ That tactical pause helped them realize that the water level hadn’t changed, but their perspectives had. The can-do spirit of entrepreneurs is amazing. This is a difficult time for everyone, but it will pass and there are opportunities ahead that could benefit business owners.

* https://www.wilmingtontrust.com/repositories/wtc_sitecontent/PDF/Wilmington-Trust-Business-Owners-Outlook-Risky-Business.pdf

The article is for informational purposes only and is not intended as an offer or solicitation for the sale of any tax, estate planning, or financial product or service or a recommendation or determination that any tax, estate planning, or investment strategy is suitable for a specific investor. Note that tax, estate planning, and financial strategies require consideration for suitability of the individual, business or investor, and there is no assurance that any strategy will be successful.