In the disruption caused by the pandemic, some M&A buyers have put the pedal to the metal.
"Buyers for our deals, which typically are the private equity groups all over the U.S. and Canada, Europe, are as aggressive as ever," says Kevin Short, managing director of Clayton Capital Partners. "They're looking for deals."
Private equity buyers, Short says, are trying to take advantage of this slow time during the pandemic to tee up deals.
"We've taken a number of deals to market during the pandemic and private equity is responding," he says. "We have one deal in Florida that we've had 165 prospects look at it. Typical for us is 100. So that's an indication of how healthy private equity is and how aggressive they are."
However, despite this appetite, there are unique hurdles buyers need to overcome to get to close.
Short talked with the Smart Business Dealmakers Podcast about how buyers are not letting much stand in between them and a deal. Here's an excerpt.
Listen to the full interview
2020 stands alone
Buyers, during diligence, have added a question to the battery they typically deploy during diligence, and that's, What effect is the pandemic having on you today and moving forward what effect will it have on your business?
Some sellers' businesses have slowed because of the pandemic, but many expect it to come right back as the COVID-19 chill on the market thaws. In some cases there are backlogs of work that are frozen in place until states allow people to return to those jobs and move it along. In those cases, drop offs in business are explainable and should not affect a deal. But most — if not all — buyers are going to ask sellers about the effect the pandemic has had and the implications of it moving forward.
In that vein, 2020 stands on its own — as an anomaly on an otherwise healthy balance sheet — when it comes to price.
"If the business has a temporary glitch because of the pandemic, then it should come back to where it was in 2019. So we're not talking about discounts with anybody because our assumption is the business has not been permanently hurt, so it's still worth what it was worth December 31, 2019."
Still, Short says that requires a conversation.
"We have to prove that up."
However, some clients that have been affected by the pandemic have taken their business off the market. They're going to wait until their business recovers and then go back on the market. Generally, there is an unwillingness to sell for a fire sale price, but some may be taking a haircut on price if they have to sell out of some level of desperation.
Diligence via tech
Generally, deals that are in due diligence are going through the process via teleconference. The technology is even being used to help buyers get to know the sellers — it's taking the place of in-person meetings and dinners. Short says buyers are telling him that that's working.
"They're feeling pretty comfortable," he says. "Frankly, most of due diligence had moved to the cloud anyway in the last three four years, so they're able to verify all the data."
Short says it has even been suggested to use a drone to take a video of the inside of the plant and the building's grounds because they would otherwise not be able to see those things.
"So they're trying to move forward because it's important to that buyer to close the deal,” he says. “They're looking for ways to create a way to see the property, see the company, see the equipment to be comfortable with all that. Nobody has stopped due diligence because of the virus. They've just changed the way in which they're getting their comfort about what they're buying."