Quality businesses cannot be sold for attractive values when nobody knows how and when this pandemic will end. Though the stock market has recovered somewhat, this has not translated into the “calm certainty” necessary for transactions to be valued, legal documents to be drafted and purchase financing to close. What should sellers of businesses do under these circumstances?
With all due respect to Admiral Farragut, his “Damn the torpedoes; full speed ahead” strategy will almost certainly fail in today’s COVID-19 M&A environment.
Sellers could make this mistake by:
- Approaching buyers now if a deal is not already in the market
- Insisting that buyers finalize letters of intent if a deal has not already been framed
- Insisting that buyers stick to the pre-COVID-19 closing checklist timeframes if an LOI has been signed
While normally a disciplined M&A process moves deals forward, trying to force a transaction under today’s extraordinary circumstances will likely:
- Result in a broken deal process as buyers and financing sources refuse to proceed, no matter what stage the deal was in
- Convince buyers that something is fundamentally wrong with the company, causing its owners to panic
- Cause extreme deal fatigue, making it that much harder to sell in better times
Instead, most sellers would be well advised to spend time and effort securing CARES Act Payment Protection Program loans, supporting employees, communicating with suppliers and customers, and planning for post-COVID-19 operations. Selling the company can wait; the process can expeditiously be restarted when the timing is right.
My colleagues and I at Citizens M&A Advisory think that the 2007-2009 Great Recession was somewhat analogous to what sellers are experiencing today. The smart and patient sellers fortified themselves during this period, re-entered the market afterward and achieved successful outcomes. Most buyers considered the Great Recession to be an extraordinary adjustment event.
Intense work is under way across the world on COVID-19 therapies and vaccines. Once medical research breakthroughs occur — and they will occur — the world will expeditiously adopt them and our society and economy will recover, creating an environment more conducive to selling. For this reason — and there are no guarantees — we think that the COVID-19 crisis is likely to be significantly shorter than the Great Recession, and today’s extreme dislocation will be viewed as a once-in-a-lifetime event to be treated as the extraordinary coronavirus adjustment.
It should be noted that the exception to this rule could be for businesses whose value is actually enhanced by this pandemic. These would be certain firms in medical, chemical sanitizer, social networking, retail delivery, online commerce industries and the like. Owners of these companies certainly deplore the COVID-19 pandemic. However, for businesses relied upon during the pandemic, this could be a propitious moment to consider a sale.
Mark A. Filippell is managing director, M&A Advisory, at Citizens Capital Markets and author of “Mergers & Acquisitions Playbook: Lessons from the Middle-Market Trenches,” published by John Wiley & Sons, Inc. Reach him at [email protected].