InSight

Exit and Growth Strategies for Middle Market Businesses

Covid Can’t Beat This Seller’s Market

By Terry Fick | Oct 02, 2020

There is good news in the air for anyone thinking about or in the process of selling a business. While the Moody’s graph below depicts, the North American M&A results fell off a cliff in April, you also see that activity has almost returned to last August levels in number of deals and surpassed that level in total value of deals!

Surprised? Let’s look at the “Why?” and “What does it mean?”.

The Why may lie just below the Covid press, but the answers we continue to get from buyers and lenders is threefold:

  1. There is simply too much capital (corporate and Private Equity) looking for good acquisitions for them to sit still. Corporations are finding it even harder to grow today, so the solution is growth via acquisition. The slowdown in the second quarter puts extra pressure on PE to find and close acquisitions. When they raised their new funds last year and early this year, they did not promise their investors “if we don’t have a pandemic, we will perform and put your money to work.”
  2. Buyers now feel they can more clearly see the real impact of Covid on the targets they are considering and as we move further through that chaos, they can also get a better picture as to what a target may look like at the end of this period.
  3. Buyers and seller are getting more comfortable with the new rules and limitations on face to face meetings. Zoom is taking deals further into the process that before Covid, and buyers are getting more comfortable traveling when necessary. Life goes on.

Outside valuation professional are telling CFA that values for good companies are holding to pre Covid levels across the board. Other factors include some level of deal structure when that can maximize value for the seller and lower risk for the buyer. Also good seller are simply holding their ground and telling prospective buyers they won’t take lower offers due to this temporary environment. The buyers know there is competition for the attractive targets.

So what does this mean to sellers? The market for sellers is surprisingly good. At some point, the laws of supply and demand will start to even the odds as more and more companies get ready and come to the marketplace. Now don’t get me wrong. It takes time for that shift to come to fruition and there will still be plenty of capital to go around. The difference will be that just as sellers enjoy the competition of many buyers, the buyers will start to have more options relative to where to put their money.

What about those companies that are not doing so well during this Pandemic but don’t want to be valued on a more cloudy rebound from Covid? You might look into selling some part of the company to bring in some new capital and boost your growth curve. That way you create even more value later on and gives you time to look for a better window to sell the balance at higher prices.

I guess the main takeaway is that most sellers can defeat Covid, at least financially. And you may just pull one over on the Tax Man while you are at it.


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