The pandemic created a good deal of uncertainty around company valuations. It’s left revenue hills and valleys in many cases, and acquirers, investors and lenders are trying their best to sort out what was a one-time boom or bust, and what is a new normal.
Go Riteway Transportation Group President and CEO Bob Zanotti says valuations are a moving target.
“The companies we're looking to acquire are typically asset-heavy and assets have strongly driven valuations,” Zanotti says. “And now with the impact of COVID, frankly I don't think we'll see deals in the motor coach space until our markets normalize. The targets are just moving too fast.”
He say there could, however, be distressed transactions that could be made. These deals offer value, particularly through customer acquisition. But what this reflects is that the rules created by the effects of COVID are completely different — that Go Riteway could actually talk to distressed companies, which would violate one of the company’s disciplines (only to buy good companies).
“We have to tread carefully and certainly engage our team of experts, both in and out of house, and get our hands around proper valuation and risk evaluation,” Zanotti says.
For Dan Scalia, managing director of Johnsonville Holdings, the focus is on investing in growth businesses where there might be some efficiencies that need to get created. That, in a way, supports what the company has always tried to do with businesses it takes on, which is to get to a fundamental understanding as to how the business is set to perform over the next five years, and what it’s going to take for that business to perform at a point where it's no longer “pie-in-the-sky” analysis. He says it can be the case for some buyers that optimistic if-then scenarios are created to justify an acquisition that are unlikely to come to fruition unless everything aligns just right.
So for Johnsonville, the strategy stays consistent, even during COVID. But in some aspects the opinions it has of the businesses its looking at are being shaped by how the pandemic has affected the market. Where there are businesses that have performed quite well, there arise questions about whether or not that’s just a trend of the moment. As a buyer in this market, it’s important to not get emotionally invested in a deal that looks good at first glance.
“Oftentimes you can get a little bit of excitement on the sticker growth and what their CAGR is going to look like and what it was in 2020,” Scalia says. “Businesses that are basing their numbers off of 2020 on the consumer food side are just not going to hit that. So, you have to handicap it in a particular way and not necessarily get caught up in all the excitement pieces to it.”
RSM US LLP Director of Transaction Advisory Services Kyle Petch notes that it’s important to scrutinize those businesses that have not experienced recent success and blame it on COVID.
“Buyers don't want to see the sellers blame everything on COVID,” Petch says. “So it's really up to the seller if they're going to go to market with numbers that are not as great as they would have been to be able to really explain the impact of COVID, to try to quantify that. And I think that's really been a problem in the market.”
Sellers going to market who’s businesses are now overperforming are getting questioned by buyers who want to understand how COVID helped.
“Because that number isn't going to be in your numbers next year,” he says. “So whether or not you've grown or not grown due to COVID, it's definitely thrown a wrinkle into forecasting and even to explain trends.”
Zanotti, Scalia and Petch, along with BMO Harris Bank Director of Corporate Advisory Robert Harrod, spoke at the recent Milwaukee Smart Business Dealmakers Conference on preparing for transactions in a post-COVID world. Hit play on the video above to catch the full panel discussion.