Despite the pandemic, good quality merger and acquisition (M&A) deals are still being done, but buyers are asking searching questions around companies’ responses to Covid-19 and their prospects for success beyond the pandemic, says Andrew Shepperd, Co-Founder of business broker and corporate finance advisory firm Entrepreneurs Hub.
“There are two things you might assume,” he says. “Either that deals aren’t being done or if they are being done, they are opportunistic deals. But actually, what we are finding is that good M&A is happening, good acquirers have still got strong balance sheets and they are acquiring in a very responsible way. The obvious question is, ‘are they cut-price deals that are unfavourable to the vendor?’ And the answer is ‘no’.”
While these acquirers continue to behave in a responsible way, they have three Covid-19-related questions as part of their due diligence: How have you performed through the pandemic? What are the future prospects of the business? To what extent did you leverage Covid support and how have you reported it in your books?
1. How have you performed through the pandemic?
Acquirers are generally very understanding about the challenges companies have faced during the outbreak, says Andrew. In many ways they now feel more confident about the businesses they are buying because those that are still trading have already demonstrated real resilience.
They anticipate contracted revenues through the worst months and so also want to know what business was like beforehand and what it looks like in the months ahead. What they are looking for is a trend line that will enable them to value based on business norms rather than the depressed period of lockdown.
Andrew says: “They will want to understand what the pandemic was like for you. What did it feel like in the business? What did your customers do? What did you do with your staff? They’ll also want to know whether you kept operating fully or closed down, how you maintained customer obligations, what happened to your cash, did your projects pause or get cancelled altogether, did you pick up different kinds of work, and was the size of your orders bigger or smaller than normal.
Overall, they are looking for the colour that will give them a clearer understanding of your business.
2. What are the future prospects for the business?
Inevitably, acquirers will want to understand how you will continue to be successful when the pandemic is over. If your products have been in demand during the crisis, how will you maintain sales, and if you pivoted to produce products like hand sanitisers or perspex masks, will demand remain or how will you return to your previous business model?
But acquirers will also want to understand how you’ve embraced the digital transformation in order to meet the demands of an altered business environment. Andrew is regularly hearing questions from acquirers, particularly in the tech sector, about a target company’s cloud strategy and how they are addressing customers’ problems through the cloud. They want to know about online information, online ordering and ordering support and how online orders are fulfilled.
Andrew says: “I’ve seen a number of business that I work with, and these are privately owned SME businesses, whose revenues have gone through the roof by going online. If you went back 10 months ago when Covid was starting and some of their traditional customers and traditional ordering and fulfilment were jeopardised, revenue flows were highly disrupted. By going online not only have they recovered but they have grown more quickly.”
3. To what extent did you leverage Covid support?
Acquirers don’t just want to know whether you took advantage of the Job Retention Scheme, the Coronavirus Business Interruption Loan Scheme or the Bounce Back Loan Scheme. They also want clarity around how these are reported in your books.
Having taken advantage of this support is not seen negatively and it is often viewed as just good business sense, since the loans were offered on extremely favourable terms and could be used to finance expansion. While businesses are generally considered to have demonstrated resilience by continuing to trade through lockdown, acquirers will want to reassure themselves that your success doesn’t rely on government support.
“They are assuming that businesses have taken the support and generally acquirers are very supportive, says Andrew. “They just want it reported clearly. Generally, it is broken out onto a separate line of your profit and loss report and they are fine with it.”
Finally, don’t be surprised if an acquirer asks you how you are with real feeling. Perhaps a positive outcome of the pandemic is that a touch of humanity has returned to mergers and acquisitions, says Andrew. He has seen genuine concern for business owners from acquirers who recognise the pressure they have been under in recent months.