By Chris Parisi

In the world of mergers and acquisitions, 2020 has been, in a word, interesting. The year started off well, with most industry sectors seeing strong deal flow, ample financing and favorable deal terms for most sellers. By the end of Q1, however, COVID-19 made its presence known, and many deals were put on hold or renegotiated. But over the past few weeks, we’re seeing buyer-seller conversations picking back up, and many investors are poised to make strategic moves in the second half of 2020.

As buyers begin to wade back into the market, business owners who had been considering selling their companies this year should prepare for renewed opportunity in the coming months. While it’s important to recognize that buyer interest may be restarting, the M&A environment has changed. With social distancing measures still in place and a new normal still being defined, valuations, assessments, site visits and other processes are being reshaped.

Business owners who are considering selling face four critical questions to think about in navigating the new normal:

How will potential buyers evaluate future revenue potential? COVID-19 has made it difficult for many business owners to project future revenues. That’s the case for companies that have been relatively unaffected by the pandemic—or even benefited from it. In fact, a recent survey of the U.S. middle-market lending and M&A environment by Carl Marks Advisors found that the single biggest challenge to dealmaking and closing new investments in 2020 is the inability to project revenues with confidence.

With revenue a less-reliable indicator of the health and future prospects for companies this year, investors are looking beyond current cash flow. They are also examining other critical factors, such as management team quality, future prospects for the industry, customer relationships and concentration, supply chain advantages and risks, pricing power, and marketing and sales capabilities.
Business owners should also understand that buyer interest, capital and financing will be there in the second half of 2020 and beyond—as long as the mid- and long-term prospects for their business and industry are sound. The companies that receive the most interest from buyers will be those that used the COVID-19 health crisis as an opportunity to take market share and adopt new, cutting-edge solutions that add value for their customers, business partners and other stakeholders.

Who are the buyers these days? There is understandably a lot of worry from companies that there won’t be enough buyers in the remaining months of 2020 and later. However, there is a significant amount of dry powder in the market for buyers to invest in growth-oriented companies and capital needs to be deployed in order to generate a return. Private equity in particular is a class of buyers that is not only sitting on a lot of pent-up dry powder—to the tune of $1.5 trillion, according to Preqin—but also has a real hunger for deals to put that money to work. Strategic buyers are also looking at acquisitions to quickly adapt to a post-COVID world. For example, Lululemon’s recent $500 million purchase of fitness startup Mirror.

After the financial crisis of 2007-08, major declines in M&A activity were followed by significant recoveries in a period that produced some of the best investment returns of the last 20 years. Many investors are hoping for similar opportunities in the aftermath of COVID-19, and that’s why buyers are still looking for deals that will rekindle their capital deployment in the months ahead.

Are companies that are in the early stages of recovery marketable, or should business owners wait to rebound more fully before going to market? If a company was well positioned before the pandemic, has a sound value proposition and customer base, and shows signs of recovery and adaptability as lockdowns are being lifted, there is no reason to believe it won’t attract significant interest from buyers. In fact, the supply/demand equation may have shifted even more in sellers’ favor, and while some industries have been permanently impacted by shifting consumer behavior, buyers will assess each company and industry on its own merits.

With 2020 already half over, companies that wish to pursue a sale over the next year need to prepare now, particularly if there is a second surge of COVID-19 in the fall as many health experts predict. While the pandemic means a number of variables must be taken into account, most important is cash position and business owners must work diligently to preserve liquidity. Strategies to achieve this include renegotiating rent obligations, reducing cash payments for goods and services, considering staffing needs, researching potential tax deferments, and developing a post-crisis cash flow budget.

How will buyers conduct site visits moving forward? There is no question that seeing a business, its team and operations up close and personal is invaluable to a potential buyer. It offers buyers the chance to kick the tires, get to know the people, and really dig in before investing their money.

However, investors are likely to reduce these in-person visits to the bare essentials and supplement with lots of online diligence and interactions, at least for the remainder of 2020. Site visits may only occur if a site is within driving distance, but if an investor does choose to fly, expect longer stays and deeper dives in place of what might have been a two- to three-hour visit in the past. Many may also continue to rely on virtual site visits.

To enable greater reliance on remote diligence, sellers should prepare high-quality video footage and photos of their operations and key management team members. They may also consider anonymous employee and customer surveys to show positive sentiment. Business owners should do everything possible to make both in-person and virtual interactions as comprehensive and thoughtful as possible.

This is also a good time for sellers to revisit their business from a financial perspective, keeping in mind how a buyer might view their numbers in the current uncertain environment. Business owners should work with advisers to prepare monthly and annual financial statements in accordance with GAAP, and carefully document COVID-19’s financial impact—or else the pandemic’s temporary effect will be positioned as an add-back in the historical financials.

Had the novel coronavirus not appeared, the M&A market might still be as strong as it was in 2019. As deal flow begins to rebound, both buyers and sellers must consider what the new normal will be. How companies are assessed from initial conversations through due diligence to deal closing will change as both buyers and sellers adapt. It’s important to understand these changes and ask the right questions in order to enable a successful—and profitable—sale process.

Chris Parisi is a managing director at Carl Marks Advisors, a New York-based investment bank that provides financial and operational advisory services. He can be reached at cparisi@carlmarks.com.