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What do the easing of lockdown restrictions mean for M&A?

‘Stay Home, Protect the NHS, Save Lives’.

On the evening of March the 21st it was announced by The Prime Minister that the UK would be placed into an immediate lockdown, in an unprecedented step to attempt to limit the spread of COVID-19. The days and weeks that followed brought substantial change to every individual’s daily lives; both from a social and professional point of view. As the world now looks to transition from stringent lockdown to normal daily life as we once knew it, a relevant topic of discussion is to understand what significant macro and micro economic changes have happened as a result of the global pandemic.

The ease of social restriction seems to be developing week by week. However, what changes are happening to the economic restriction? Specifically, what effect will Covid–19 have on Mergers and Acquisitions?

In the short term, it came as no surprise that M&A activity diminished across all sectors and nations, as buyers and sellers were naturally consolidating their own cash positions. It also came as no real shock to see many sellers placing their exit plans ‘on ice’ in lieu of understanding the broader situation post lockdown. As well as this, acquirers naturally became tentative to progress any current deals or in some instances, withdrew from them all together. As we progress through the easing of lockdown restrictions, this could genuinely be the best opportunity for sellers to get ahead of the curve in preparation for an exit as the restriction and pandemic situation continue to improve.

Covid-19 Lockdown sell a business

 

Will the market ever be the same again?

We are not the first to report that levels of M&A activity were at an all-time high in the years running up to 2020. At the turn of the new year we were seeing record levels of enquiries, offers and sale completions that lead to extremely positive values being achieved across all sectors. The process undertaken to achieve these highlights will expectedly be carried out differently in the short-term future, but this certainly does not mean that they will become extinct. The progressive process of achieving optimum value for a business may subsequently evolve during 2020 and throughout the decade:

  • Virtual Meetings.With the increase of Virtual Meetings, we can reach people quicker than ever before. At the start of the year, it would sometimes be weeks until a key meeting could be arranged and facilitated due to diary or location congestion. With video conferencing, we can reach more people, in more locations, quicker than ever before – facilitating this with the utmost discretion. This has tangibly returned a constant inflow of both exit consultations as well as buyer meetings, resulting in more offers than anticipated on businesses we represent.
  • Financial ModellingBuyers will want to know more about a business’s past and what this could do to future trading and earning potential. Following the pandemic there will be more scrutiny placed on the financial performance of a business. It is vital to consider and to portray the possibilities of a business’s performance following this unprecedented scenario.
  • Deal Structuring and TermsIt will be likely that deal structuring will change in a respect to allow for a more dynamic ‘enterprise value’. Expect to see advanced offerings that evolve the typical cash on competition and earn-out structure. The anticipation would be to demonstrate a broader business value that could fulfil a greater long-term value and subsequent overall enterprise value.
  • Legal DelaysAs M&A activity increases, advisors across all key professions will experience an increase to their ‘work in progress’. The Legal process of the sale may be elongated to facilitate this alongside a more thorough and cautious buyer due-diligence process. This places colossal impetus on working with the right network of advisors to minimize attrition or any argument of material adverse change during key milestones of a transaction.
  • Increasing Enterprise

An obvious negative impact towards the labour market is that unemployment levels have significantly increased during the global pandemic. Unfortunately, there are certain industries and job roles that will be all but redundant post-pandemic. We have already seen an adaptation to this through a dramatic increase in new business start ups and entrepreneurship. Furthermore, we are seeing more and more articles that suggest the best time to take the step towards entrepreneurship is now. Ultimately, this will create an exciting injection into economic and M&A activity over the forthcoming years.

Consideration

There are many opinions and discussions around the best valuation technique to approximate the value of a privately owned business. Traditional EBITDA multiplier techniques will become more complex because of short-term changes to a business’s financial performance. We have seen some substantial spikes (both negative and positive) to monthly EBIT management reports from businesses since March, all of which would appear to be a direct correlation to the Virus and Lockdown.

This may somewhat distort valuation and/or client aspirations as to what a good deal looks like on both the sell and buy sides, respectively. It is important to measure this for what it is; a macro short term change that – as discussed at the start of this piece – has affected everyone. Different sectors such as E-commerce will be dramatically different to the Hospitality and Travel sector. However, if the broader financial history and future potential can be corroborated effectively, a sector’s financial trend during the pandemic should not determine a sectors possibility to optimize value during and post pandemic.

End of Covid-19 Buy a business

Final Thoughts

For SME businesses, Covid-19 has no doubt changed almost every element of trading and operating activity. Broadly speaking, sectors have seen disruption; be it revenue, opening hours or staffing. Positively, this creates a huge amount of upside for growth. Now could be the absolute best time to buy or invest in a buy and built strategy through the acquisition of a successful platform to develop. Monetary circumstance has never encouraged M&A activity as much as it is currently positioned to do where high levels of liquidity remain on a global scale. Whatever trends, surprises, declines or ascendancies we may see over the next few months, one thing is noticeably clear, M&A deals will continue to take place and the market is very much open for business.