The economy, for so many obvious reasons, is among the top concerns of businesses at the moment. Depending on the industry and their position as lagging or leading indicators, businesses could either still be relatively busy or watching their revenue slide, says Vincent J. Garozzo, an officer with Greensfelder, Hemker & Gale P.C.
As operators worry about the economics — how long this COVID-19 pandemic is going to last and whether they have the staying power to keep their doors open — buyers are casting their eyes toward the market in order to find ways to keep their business moving.
Garozzo shared his view of the market on a recent episode of the Smart Business Dealmakers Podcast. In this excerpt, he offers his perspective on deal flow, the seller mindset and the position of capital institutions.
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While private equity buyers keep saying that they’re going to pursue deals, deal flow has constricted, says Garozzo.
“If you were a potential target before this pandemic, and now with your EBITDA most likely decreasing fairly significantly in this quarter, there’s going to be a lag between when the buying activity picks up again because the sellers of the world aren’t going to take the EBITDA hit in their valuation,” Garozzo says.
He expects a stagnant period in M&A, although just how long that stagnation will last is debatable. It could last until the pandemic ends, or buyers could take data from a couple of quarters, annualize it and come up with a valuation that more accurately reflects the performance of the target.
“There are many industries that are doing just fine,” he says. “If I was selling toilet paper, I’m probably going to have a record year. It just depends on the industry that you’re in, how much you’ve been impacted by it and whether your revenue returns to pre-pandemic normalcy in a short period of time after people are permitted to return to work.”
The state of capital
One contributing factor in the pace of deal flow is PE firms that want to put their money to work.
“They’re going to be anxious to get their funds invested, but there’s going to be a bit of a battle to get the sellers their pre-pandemic valuations when the EBITDA numbers are going to justify it,” he says.
Financial institutions, often the funders behind the deal, came into the pandemic extremely strong, especially the large money center banks. Garozzo believes they’re going to make it through this situation without much trouble.
Still, they’re all increasing their loss reserves because there are going to be losses as some big companies file chapter 11 — retailers, for example, are having a tough time right now. That’s creating some pressure on the larger financial institutions that have participated in their syndicated credit facilities.
Regional and community banks shouldn’t have any trouble getting through the situation, Garozzo says. The PPP loans that they’ve been processing are helping their clients and keeping them afloat, hopefully until everyone can return to work.