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M&A Insights – Mark Young, Managing Partner, CKS Advisors

Welcome to the October 2020 edition of M&A Insights. Our goal at CKS Advisors is to help you stay up to date on the Mergers and Acquisitions climate.

This month, we would like to highlight what business owners’ “need to know” regarding COVID-19’s impact on selling a business.

Buyers Remain in the Market

According to GF Gata, through mid-year, deal volume was nearly 40% below last year’s levels. However, all indications are that buyers remain interested in doing deals with initial indications for 3rd quarter activity showing a rebound. Presently, we too are seeing an increase in buyer activity, which is encouraging, and expect that to continue as uncertainty in the market wanes. Buyer interest is driven in part by the following:

  • Financial Buyers (Private Equity) — have raised record sums over the past several years thus still need to invest those funds to meet their commitments to investors.
  • Strategic Buyers — are looking to position themselves for a post-COVID world, so they too are keenly interested in seeking companies that can enhance their market position as they have found growth by acquisition to be an expeditious means of gaining market share.

Documenting the Pandemic’s Effect on Your Company

To fully explain COVID’s impact on their company, it is important that as a business owner, you take the time now to document its effects.

  • Documenting the operational and financial effects of the pandemic will assist in several ways:
    • Marketability — Provide buyers with clarity regarding company operations during the COVID period. The more detail a buyer can be provided when it comes time for you to implement an ownership transition, the more they will understand and not have to guess as to COVID’s impact and how the company responded.
    • Enterprise Value (Sale Price) — If COVID related revenue impacts, costs, and expenses are justifiable as either one-time in nature and/or nonrecurring, buyers appear to be receptive to adjusting a company’s EBITDA, which should ultimately increase valuation. When COVID related adjustments are well documented, they are more likely to be agreed upon by buyers.

Is it a Good Time to Sell?

Timing the sale of a business is always an important consideration. Today, it is even more critical given COVID’s impact on the economy. Despite what many may feel, today may not be a bad time to explore options.

Things to consider:

  • Buyers are always interested in fundamentally strong companies. If COVID negatively impacted the business, but a company is showing signs of recovery, it should still attract buyers’ interest.
  • Companies that provide on-going solutions to issues arising from COVID (i.e., sanitation companies, virtual technologies, etc.) are in an excellent position to consider beginning the transition process.
  • To bridge potential buyer-seller valuation gaps, we are seeing increased use of purchase structures that include contingent considerations such as earnouts, rollover equity, and seller’s notes. These contingent considerations can help to bridge valuations back to pre-COVID levels, which were at all-time highs.

In Summary

  • Preparing your company for a transition is always important and is even more important today. Starting early never hurts.
  • Start documenting COVID’s impact on your company NOW! Waiting to start this process in a year or two will likely result in missing important items.
  • Consult with your professional advisors as well as an M&A advisor to determine what you should be doing today.

 

If you would like to learn more about the M&A market or are ready to take the next step to explore your options, we would be glad to meet. Please contact me at 480-351-8533 or myoung@cksadvisors.com.

This Post is for informational purposes only and does not constitute an offer, invitation or recommendation to buy, sell, subscribe for or issue any securities. While the information provided herein is believed to be accurate and reliable, CKS Advisors, LLC and Ashland Securities, LLC make no representations or warranties, expressed or implied, as to the accuracy or completeness of such information. All information contained herein is preliminary, limited and subject to completion, correction or amendment. It should not be construed as investment, legal, or tax advice and may not be reproduced or distributed to any person. Certain Principals of CKS Advisors, LLC are registered representatives of Ashland Securities, LLC Member FINRA, SIPC. CKS Advisors, LLC and Ashland Securities, LLC are separate and unaffiliated entities.  Securities and Investment Banking Services are offered through Ashland Securities, LLC.