There are a lot of factors affecting M&A today. For instance, the Paycheck Protection Program loans, often referred to as triple P loans, have added a degree of uncertainty to the M&A diligence process.
The Small Business Administration is just beginning the forgiveness process, so there currently is little visibility into its determinations on whether triple P-receiving companies have met the standards it set forth for forgiveness.
“That has a huge impact, if you’re diligencing a new opportunity, on what are we going to do with the triple P? Is it going to be forgiven? If it’s not forgiven, how does it affect the capital stack?” said Joe Alala, chairman and CEO of Capitala Investment Advisors LLC, at the Charlotte Dealmakers Conference.
M&A is also being impacted by the pandemic-related uncertainty looming over the market — mainly, that there’s a chance the market could experience another shutdown if COVID cases continue to trend higher.
But the pandemic hasn’t been all bad for dealmakers looking to transact. There are industry bright spots in which companies — health care, for example — have become very attractive M&A targets. And that’s encouraging some to seize the moment.
“What we did to shift is we started looking for opportunities,” said Doug Lebda, founder, chairman and CEO of LendingTree.
Valuations have changed, Lebda said. Companies that are facing challenges are experiencing declines in valuation, but companies that are doing well could produce “crazy unicorn valuations,” which he said makes M&A more of a challenge.
Overall, Ben Sloop, COO of AmWINS Group Inc., said he’s seeing a slowdown in M&A activity, largely because of the short- to medium-term uncertainty around cash flow, which he’s seeing in part because his company does deals around traditional metrics such as cash flow and EBIDTA. But there are other reasons for the slim M&A pickins.
“Sellers can pick their time,” Sloop said. “These are businesses that aren’t distressed. They’ve got recurring revenue and existing books of business, so sellers can pick their time and understandably. over the last six months. a lot of sellers have figured this is not the best time.”
Sloop, however, said he hasn’t seen valuations for the deals that have come to market ease off at all. Part of that seems to be because those businesses can support a decent amount of leverage. And because that looks inexpensive over a long period of time, it’s pumped up multiples, which is unexpected.
Catch the rest of the insights offered by Alala, Sloop and Lebda in the opening Dealmakers Charlotte panel, moderated by Executive Vice President and Charlotte Regional President of FNB Corp. Brad Jones, in the full post-event video.