The Impact of COVID-19 on the M&A Ecosystem.
OK - let me just get this out there first... We don’t yet know the full impact of COVID-19 on the merger & acquisition ecosystem. We may not know it for some time. For me to predict where it’s going is as ludicrous as someone trying to predict what the economy will look like a year from now. While we certainly know the early impact on M&A, we have no idea what’s going to happen 3, 6 or even 12 months from now. But, let's explore what we’re hearing right now.
What's happening now?
Investment bankers and business brokers largely agree that things are different now. Investment bankers and business brokers provide largely the same service but typically for different size companies. For the most part, if I can risk making a generality, brokers represent businesses under $10 million in revenue, and investment bankers represent businesses over $10M in revenue. There is some overlap. That’s a pretty broad definition, and there’s way more to it than that, but for simplicity, that’s where we’ll keep it for now. In terms of sheer numbers of opportunities, the business brokers have more opportunities for deal flow. Their buyers are either individuals or businesses looking for bolt-on acquisitions. In terms of deal size, investment bankers typically represent larger deals. Their buyers are usually either strategic or financial buyers.
Why do we say there are more opportunities for brokers? Of the 6.05 million businesses that employ people in the US, nearly 5.7 million of them are under $5 million in revenue. That’s 94% of the businesses that employ people. (There are another 22 million businesses with no employees other than the solo-preneur or contractor.) So the pool of businesses in the broker’s wheelhouse is over 16 times the size of the pool of businesses in the banker’s market.
Certainly, with the outbreak of COVID-19 in the US earlier this year, the M&A space has reacted in a mixed way. We're hearing from some M&A advisors that deals that were set to close are now either paused or off the table completely. We hear that some deals (both large and small) that were scheduled to close did so. We hear that some buyers are not returning calls right now. We also hear that buyer inquiries to business brokers were way off for a few weeks, but are now rebounding… not to the levels of pre-COVID, but at least some activity. Several investment bankers have shared that buyers are at a minimum pumping the brakes and proceeding with caution. I’m told that some financial buyers (private equity or venture capital) are pausing all M&A activity, while others are plowing ahead to deploy their capital. I frequently get inquiries from prospective buyers hoping that I have a client that is ready to sell. I can tell you that those calls have not slowed down. The good news is that things seem to be moving forward, perhaps at a slower pace, but they are not completely dead.
Prediction for the future
Here's what we do know about the ecosystem for M&A transactions. (Spoiler alert - there is no great revelation here!) Active buyers can find some great opportunities right now and that will continue into the near future. How far into the future, we don't know. There are good deals to be found now, but frankly, there are always good deals to be found. Buyers with cash or the ability to raise capital quickly will have the best opportunities for the foreseeable future. But, that is always the case. Sellers that have not been impacted by the pandemic are in great shape right now. For sellers whose value has been impaired, if they decide to forge ahead and attempt a sale, they should think long and hard about creative ways to make up the possible delta in valuation through creative financing, earn outs, or possibly remaining with the company longer than anticipated.
What to do now...
Here, let me start with the premise that there is always a market for a well-run company. That’s worth stating again. There is always a market for a well-run company. Although the valuations may go up or down depending on what is happening in the M&A ecosystem, there are always buyers for a well-run company. There is another thing that is also always true. Whether you’re thinking of selling now or 10 years down the road, it is always a good time to prepare your business for an eventual transition. Every business will transition. Even the largest companies in the world transition. The difference is that larger companies spend years planning those transitions and small businesses ignore those transition issues until it's almost too late to do anything about it. I mean, think about it. The process for Jack Welch to become the CEO of GE started almost eight years before he took the job. GE was planning that transition for a very long time because they knew it was important and that it would dramatically impact the business. And when it was time for Welch to retire, he took a number of years to plan for a smooth transition as well. You see, large businesses understand that transitions need to be planned. Transitioning a business without a plan, no matter the size, just doesn’t make good business sense. Why is it then that many small businesses fail to plan for that inevitable transition event?
Perhaps, it's because for most business owners, transitioning their business is a once in a lifetime event and they know very little about the transition process. Perhaps it's that many business owners don’t really understand the true value of their business. Perhaps it's because the business owner really doesn't want to retire. Or, perhaps it's that they really don’t know what they will do in their “Third Act” (life after the business). Baby boomer business owners (who, by the way, own more than half of those 5.7 million businesses) just like to work. After all, we invented the 60-hour workweek, didn't we? By the way Millennials, you're welcome. Whether you’re planning to transition next year or 15 years from now, you should start working on it today.
So, stop right now, and download our eBook “Things You Need to Think About to Improve the Value of your Business.” (just click the picture and it will take you right there)
It’s a quick read, then decide the 3 things you’re going to do now to prepare your business for that future, inevitable transition.
Message me on LinkedIn or on our Facebook Page or email me or call my cell and tell me what you are going to do. Make sure you’re ready when the time is right. What are you going to do today - to Maximize Business Value? And remember, we’re here to help. I've been there 100 times, literally. If we can help you in any way don’t hesitate to reach out!