Middle Market M&A and Coronavirus: What’s Next?

  • Industry trends
  • 10/2/2020
Will Coronavirus Quarantine Middle Market MA

It’s hard to predict what comes next in the economic climate. Both buyers and sellers of middle market companies will need to adjust their M&A expectations and approach with the coronavirus, trade wars, and the overall global state.

Key insights

  • Despite an initial downturn in M&A due to COVID-19, CLA has seen the market bounce back and continue a positive trend.
  • The buyer’s market is flush with cash, increasing the demand for new acquisitions. On the other side, most family- and entrepreneur-led businesses looking to sell are not making decisions based on timing the market.
  • Both the buyer’s and seller’s markets need to adapt to new market forces by coming to the table with a different mindset.

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To say a lot has changed since the start of the year is an understatement. As we moved through the first quarter of 2020, there was confidence that middle market mergers and acquisitions (M&A) activity would trend back up for the year. And then the coronavirus pandemic hit. Despite the chaos, activity didn’t dry up completely. While there was a definitive dip initially, the market has bounced back sooner than expected.

As the pandemic remains top of mind for everyone, major indicators point toward a continued positive trend.

The buyer landscape is adjusting

Private equity is coming off a streak of record-setting years of raising capital and there’s a lot of cash still ready to be invested.

Private equity, however, isn’t the only player in the market. Corporate buyers have also been sitting on piles of cash, and with the cost of debt at favorable rates, it may make sense for many companies to grow by acquisition. Despite COVID-19 concerns, corporate buyers have been closing deals in the lower-middle market, likely due to their familiarity with the risk elements within their own industries. the fact that they can quickly become comfortable with the risk. In addition, independent sponsor and search funds are still on the hunt for opportunities.

Between the amount of cash waiting to be deployed and the larger variety and volume of buyers in the market, demand is driving the market back to pre-coronavirus levels.

Business owners shifting their exit strategy

Since the Great Recession in 2008, the U.S. had seen the longest economic expansion in history. As the economy grew, business owners looking to exit showed an increased level of sophistication and preparation in order to receive the highest return.

The recent downturn has had varying levels of impact across different industries; some have been hit hard and face an uncertain future, while others are booming. Regardless of industry-specific impact, the entire economic structure shares concerns that are exacerbated by coronavirus challenges, uncertainty about the election, and international trade (i.e., tariffs).

Many private business owners at the lower end of the middle market looking to sell, especially those at or near retirement age, are not trying to time the market to get the highest multiple. The looming uncertainty, coupled with all the cash on the buyer’s side, is prompting sellers to accelerate their vision for an exit.

Getting deals done in a COVID world

With a competitive buyer’s market and sellers motivated to get out of their businesses, the big challenge becomes finding a way to enter into a deal in the new world. Not only has COVID-19 changed how deals get done without face-to-face communication, it also impacts how both buyers and sellers determine the value of a business coming off potential COVID-related shutdowns. A few things that both sides should think about as they enter into a deal include:

  • How best to interact in a new environment and build relationships to get a deal done
  • Fully analyze both short- and long-term financial impacts, including adjustments to EBITDA and working capital (buyers should understand potential risk; sellers should drive the discussion and assumptions so they can tell their own story of what took place)
  • Understand the customer base for potential long-term impacts to the market
  • Understand the supply chain and potential disruptions or find alternative sources
  • Changes to the workforce, or other lasting impacts of the pandemic and the workforce environment

How we can help

The consistent element of uncertainty and change in our world — as demonstrated by the coronavirus — highlights the need for experienced advisors when dealing with M&A. The professionals at CLA work with middle market companies daily, bringing firsthand knowledge of their operations and challenges. We advise clients on both the buyer and seller sides to bring a comprehensive perspective when helping you complete a transaction.

We are here to help as you maneuver your way through business or financial decisions in this climate, specifically as they relate to M&A.

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