M&A Activity Update August 2020

M&A Activity Update August 2020: A Resilient Market

It has certainly been a tumultuous year for all of us. March and April brought an almost unprecedented level of uncertainty, which is the enemy of all businesses. At this point in the year, however, we have been impressed with the resiliency of many businesses as well as the M&A market in general. Here are a few observations:

  • There is still a strong interest in M&A from Private Equity and Strategic buyers.
    • Private Equity has a strong appetite to acquire businesses with good fundamentals and positive long-term outlooks. We are contacted by multiple groups on a daily basis reminding us of their interest in considering new opportunities.
    • Strategic Buyers, most who will be challenged to grow organically in this environment, will need to look to  M&A to fuel growth.
  • We have recently talked to many  business owners who have decided to pursue/consider the sale of their business now.  We believe this is driven by in large part by:
    •  Current tax rates are likely the lowest they will be for the foreseeable future (this is a nice way of saying capital gains rates will be going up depending on the results of the election)
    • The challenges created by COVID have made some realize this is the right time to exit the business (a nice way of saying many business owners are tired)
  • Many businesses continued to operate throughout the entire "shutdown" as the definition of essential businesses was very wide.
  • The effect on businesses varied significantly depending on the industry. We see four general categories:
    1. Businesses that have not been affected or have even experienced an increase in business (Ex: virtual support services, some consumer products, etc.).
    2. Businesses that have seen a decrease in revenue but expect to quickly recover (Ex: medical supply companies with products used in elective surgeries).
    3. Businesses that have been negatively affected and their return to historical levels will be driven largely by the health of the overall economy (Ex: auto suppliers, general industrial).
    4. Businesses that have been negatively affected, and their return to historical levels is very uncertain (Ex: entertainment/hospitality-related businesses).
  • Although many Capital Spending projects are still moving ahead, most companies are taking a very close look at their strategic plans. It is too early to tell how these decisions will play out. Their ultimate decisions will have a significant effect on the trajectory of the recovery.
  • Middle Market Lenders are currently reluctant to fund deals at aggressive valuations. In many cases, this will result in the need for more creativity in structuring deals.

Now, more than ever, there is no one-size-fits-all answer regarding the valuation of a business. One thing is certain: businesses with strong track records, a solid management team/employee base, and opportunities for growth will continue to be in demand and will command the highest multiples.

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