The panel, titled 2020 [RE]VISION: Texas M&A, discussed how deals are getting done when handshakes are forbidden and featured real stories, market intelligence and timely predictions from some of the region’s middle market business leaders. Michael joined the panel to discuss the M&A financial landscape amid COVID-19 and what businesses can expect in the months to come. Michael provided some of his thoughts on the topic in this Q&A below.
What did the M&A landscape look like prior to COVID-19?
Prior to the COVID-19 pandemic, the M&A market was extremely strong, and we saw the largest amount of activity in the space we had seen in decades. In addition, the high demand was creating a valuation gap, meaning purchase prices were at historic highs, with earnings before interest, tax, depreciation and amortization (EBITDA) multiples reaching over 10. High multiples like this meant two things – one, it was a seller’s market, and two, purchase price inflation had led to increasingly large differences between purchase price and asset valuation. And then came the COVID-19 pandemic that changed everything.
What does the M&A landscape look like now amidst COVID-19?
In early March, the world as we knew it stopped. We quickly transitioned to a remote working environment, and the economy halted. Even today, we continue to face extreme uncertainty. Deals are still happening, just at a much slower pace. People are being more diligent than ever as we all review the impact of COVID-19 and the effects it is having on the economy and businesses, especially in the M&A market. Prior to the pandemic, you could look at historical trends, you could make projections and have more certainly in those forecasts for companies you were looking to acquire. That’s not the case anymore as COVID-19 has impacted every business differently and the full scope of that impact – by industry and individual business – hasn’t been recognized yet. To combat that, people are looking at the COVID effect on every aspect of a business’s operations, including buying power, accounts receivable and payable, budget and revenue forecasting, and personnel and benefits.
What advice or strategies do you have for those who are still looking to make M&A deals?
There are a few pieces of advice we have, including:
- Take your time: In many cases, issues surrounding M&A deals typically arise from moving too quickly. Sometimes a deal requires a quick turnaround, but it’s critical to carefully consider each element of the transaction. Signing the contract before securing financing, discussing financing with the other party before talking to your lender, or failing to assemble a team of key players early enough in the process can all make the transaction more complicated—or completely fall apart.
- Perform due diligence: From a financial perspective, failing to “stress test” the deal to account for unforeseen losses or performance decline is a major problem and can lead to the deal collapsing or unexpected issues after closing. Especially now. Completing a careful analysis and forecast can help ensure this deal works now, and into the future.
- Consider the people involved: Getting the numbers and details right is critical to a successful deal, but it’s equally important to think about the impact of the merger on company culture, employee retention, and client relationships. Failing to consider the potential people-driven risks involved in a deal can leave buyers with client attrition or unexpected holes in leadership teams. It’s crucial to build relationships with clients and employees and address cultural concerns proactively.
- Find the right partners: With so many factors impacting M&A deals, the job of a lender goes beyond financing the transaction. Before we ever determine a financing structure, our focus is on serving as an advisor and ensuring our client has considered all the logistics, implications, and potential costs of the deal prior to entering a contract.
Also, remember that successful M&A deals start and end with trusted advisors. With the proper guidance from lenders and other professionals, buyers and sellers can still execute an effective M&A process – even in today’s climate.
If you are interested in learning more about how UMB can help your business as a financial partner, visit our website.
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