Investors at TVV Capital focus on stable, established, U.S. manufacturing companies with consistent cash flows and management teams capable of running the business. While that core practice is expected to continue, there's room in that strategy to capitalize on opportunities of the moment.

"There's always the possibility that you might start looking at companies that are in incrementally more dire straits than the ones that we traditionally look at," says AJ Byrd, managing director at TVV Capital. "I think you are going to see a lot of opportunity in the markets to go in and buy things off the courthouse steps, buy things off people who are having a hard time, and incorporate them into your existing portfolio companies."

Byrd talked with the Smart Business Dealmakers Podcast about the prospects for buyers in the short-term during the disruption. Below are excerpts from that conversation.

Listen to the full interview

Strength, opportunity, uncertainty

Given the circumstances in the market, now could also be a good time to look into adjacencies — ways to expand the portfolio horizontally. It's not only an opportunity to broaden the business with less of an investment, it's also a chance to add services that ultimately benefit customers.

"You should always be looking, if you're in the manufacturing business, for those ancillary services that people need in order to either purchase or use your parts so that you can be the 'easy button' for your customers rather than being just one of 50 people in the supply chain that they have to manage," AJ says.

Making acquisitions right now, however, means having the capital to transact. That likely won't be a problem for companies that are strong and whose performance hasn't been negatively impacted by the pandemic. Those companies will still have access to outside capital. But there is a lot of fear in the market, which could change the willingness to lend in all but the best circumstances.

"Nobody really knows what's happening," he says. "And so you're seeing banks get antsy. You're seeing a lot of the traditional equity and debt sources start to take a hit as earnings are taking a hit. As a result of earnings taking a hit, you're seeing LOIs get broken, you're seeing lenders having a hard time wanting to extend credit. And that's the basis of my argument that cash is king. You need to make sure that you continue to have access to liquidity so that you can survive short-term disruptions in the capital markets and work your way through to the long-term."

De-risking deal terms

For those companies in a strong position — whether it's a healthy amount of cash on hand or a strong performance that gives lenders confidence — there is a good chance they can find deals in the short term at lower multiples than before the pandemic.

"What you're going to see as a result of this disruption is a lot of companies are going to look like they got a little more hair on them when it comes to getting these deals done," AJ says. "They're not going to attract those sky-high multiples that once upon a time they did."

It won't be as bad as it might sound, he says. He believes there's going to be somewhat of a cushion because everyone's going to be taking the same hit all at once. But because the pandemic has cast a lot of uncertainty on the future, buyers will likely want a bargain, and they will look to take as much risk off their plates as possible.

"That near-term uncertainty and near certainty of lessened near-term earnings is going to tend to drive down the prices people are going to want to pay," he says. "Investors are going to be looking very hard at those near-term projections when they shape their offers to companies. It's going to tend to result in  more earn outs, more seller financing, more contingent consideration based on future earnings than, 'Congratulations on your five years of stair-step upwards earnings. Here's a dump truck full of money.'"