Update on M&A Activity

Current M&A Activity: What you Need to Know

Although many Buyers and Sellers have hit the "Pause" button to see how the economic situation plays out, there is still an appetite for good businesses.

  • We completed a significant transaction in early April at a favorable multiple.
  • We continue to work towards closings on several transactions which were in process before the recent events. We expect these transactions to close with terms consistent with the total valuations originally proposed.
  • We receive calls/emails form various Private Equity Groups on a daily basis reaffirming their interest in acquiring solid businesses.
  • We are preparing to go to market with a new client who has performed well throughout this period.

Valuations

We have had discussion with numerous strategic and financial buyers. While there are certainly a variety of opinions regarding how valuations will be determined, there seems to be a strong consensus on several points:

Not all businesses will be viewed the same. There are generally four categories:

  1. Business that have not been affected or even have experienced an increase in business (example: virtual support services, some consumer products, etc.).
  2. Businesses that have seen a decrease in revenue but are expected to quickly recover and return to historical levels (example: 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 (examples: auto suppliers, general industrial).
  4. Businesses that have been negatively affected and their return to historical levels is very uncertain (examples: entertainment-related businesses, commercial aerospace).

Both Buyers and Sellers will need to be creative in structuring transactions. Many (but not all) transactions will require some level of Earn Out or deferred payment in order to maximize the valuation. The amount and terms will be driven primarily by which category above the business falls in.

As always, a competitive process will have a positive effect on valuation and structure.

Availability of Debt

Initial indications are most commercial banks appear to be focused on the health of their own portfolio. Administering the PPP loans has also required a lot of resources and the forgiveness phase of this program will likely be very time consuming. We believe these factors will have a negative short term effect on their aggressiveness in making new loans.

Non traditional sources such as Unitranche and Mezzanine lenders will likely be sources for more M&A transactions.

Questions? Contact your Brady Ware Capital advisor today!

 

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