Skip to main content

How is COVID-19 Affecting Small Business M&A?

real estate broker manager giving house key to customer

There’s no denying, and perhaps no overstating, the catastrophic effects of the novel coronavirus on M&A. Hundreds of thousands of businesses have closed or lost significant revenues. Supply chains are disrupted, and oil prices are on a roller coaster ride. Many deals are being put on hold, acquisitions are being canceled, and some buyers are walking away at the last moment.

Widespread shelter-in-place orders continue to prevent and limit in-person contact, further slowing M&A. This makes due diligence more challenging, strains negotiations, and makes debt financing more difficult because of volatile markets. Regulatory approvals are incredibly slow. M&A during the first quarter was down 39 percent in the U.S. Things will likely get worse, too.

So what can you expect for the deal-making landscape in the near future? Here are a few predictions:

  1. Deals that are currently in the pipeline will move more slowly. Discussions, letters of intent, regulatory approval, and due diligence will take significantly longer.
  2. Valuations in certain industries will fall greatly. Public stock valuations since February 2020 neatly illustrate this fact. Buyers and sellers may need to understand the new world so they can better identify appropriate walkaway conditions.
  3. It will be harder to find debt financing. Even when buyers can finance their deals, there will be longer delays. Lenders’ closing conditions will also be stricter.
  4. Term sheets, letters of intent, memoranda of understanding, and other deal-related documents will become more detailed, and may require more significant negotiations.
  5. Exclusivity periods will expand beyond the usually 30 to 45 days. Most buyers will insist on double that– 60 to 75 days, and sometimes even longer.
  6. Negotiating the agreement will focus heavily on changes in the operations of the company via material adverse effect (MAE) clauses. Buyers will want broad discretion to walk away, while sellers will need to be careful about the ways these clauses can limit the deal.

So does this new deal-making world offer any good news at all? Many buyers are still flush with cash, and so there’s plenty of money to be made for well-run businesses. Deal-making will now heavily favor buyers, much like it did during the Great Recession. Buyers are taking more time to find the right opportunities.

Moreover, some industries have benefited from the pandemic. Biotech, food delivery, online shopping, cloud computing, software, videoconferencing, and other technologies that support people to remain at home are thriving. Hospitality is suffering greatly, as are automobile companies, airlines, anything travel-related, and restaurants.

Owners hoping to sell their companies should be aware of the many ways their options have shifted. Whether raising capital or selling a company, owners must be extra diligent during the sale preparation process. You must keep key staff in place, since buyers will rely on their institutional and operational knowledge. Collective and individual incentive retention plans are well worth the expense. Direct, clear communication also remains highly valuable, since it can ease the concerns of stakeholders and help you set the narrative for the sale.

The first step in working with Strategic M&A Advisors is to contact us to schedule a confidential, no-obligation (and no-cost) conversation at a time and place that’s convenient for you. This will enable us to learn more about your business and your M&A goals while explaining how we can help you achieve your goals.

About Strategic M&A Advisors

Business sales come in all shapes and sizes. At Strategic M&A Advisors, we can help you determine the most advantageous option for selling your business. We handle all types of merger and acquisition transactions, from outright sales to investment options to grow your business. The first step is an evaluation of your business and goals to determine the best path to get the results you desire. If it is the right time to sell, we will assist you in finding vetted buyers or investors and getting the best price and terms for your transaction.

Posted on behalf of Strategic M&A Advisors

Contact us

    Arkansas (501) 588-8855 Mississippi (601) 714-2777