During the ongoing management of COVID-19 restrictions, we are all trying to determine and assess the short- and long-term damage on businesses, the economy, and the capital markets. While we don’t pretend to have answers better than others, we would like to share our thoughts on the impact of the virus on M&A transactions. First off, we don’t want to trivialize the health impact imposed by the pandemic nor the human element of lost jobs, life disruptions, and family separations. Our intent is to provide our strategic thoughts while we try to maintain a sense of normalcy.
Prior to the onset of COVID-19—only a month ago—the M&A markets were as strong as ever. We had all heard about the strength of economic fundamentals. The combination of a strong US economy, tremendous amounts of capital raised, liquid debt markets, low interest rates, and favorable demographics were the driving forces. Deal values and volumes were at a record pace.
Today, the economy is certainly shaken but several favorable factors remain—significant capital ready to be deployed, favorable debt markets, and demographics. But with hopes of slowing the spread of the virus and escalating medical capabilities, coupled with the massive CARES Act and PPP aid packages passed by Congress, many analysts have suggested the US economy should start showing signs of recovery in the coming quarters. With this optimism in mind, we believe M&A volume will once again strengthen later in the year.
As companies approach the M&A market, we believe there will be a need to defend current financial results, projected financial forecasts, and valuation expectations. These discussions will need to be fact-based, convincing interested parties that first half declines in revenue and earnings were temporary and a result of extraordinary circumstances, and therefore nonrecurring in nature. We believe valuations will likely be impacted short-term, but we expect to see a return to higher levels especially with the return of competition from private equity investors and strategic acquirers and for those companies that experience less business interruptions.
For business owners who are or were considering ownership transition, we believe now is a good time to prepare and plan ahead. This may include estate and tax planning, retirement and wealth management, accounting clean-up (such as pre-transaction quality of earnings), thoughts on succession management, pre-market activities (such preparing a confidential investment presentation), and strategizing with your M&A advisor on likely investors/acquirers. Accordingly, now is a good time to think and plan ahead. There will be a return to normalcy soon and pent-up demand from investors and acquirers will create a competitive M&A market once again. Those who are prepared for the opportunity will fare well.
We know these remain uncertain times but if you would like to learn more about how we can help, please visit us at www.cpa-wfy.com.