The COVID-19 pandemic has slowed deal flow for Jon Siebers, an M&A attorney at Grand Rapids-based law firm Rhoades McKee PC. Siebers said closings are down and the number of deals he has in the pipeline are “probably down a little bit, but not much.” Siebers spoke with MiBiz about how the pandemic has affected the M&A market and offered some advice for both buyers and sellers.
As the pandemic now goes into the summer, what do buyers need to be mindful of as they look for a prospect to acquire?
They need to figure out what impact the last three months have had on the business, and the best- and the worst-case scenario for the next twelve months until there’s a vaccine so that they understand not only what has happened to the business in the past, but what is likely to happen in the future and make sure they don’t overpay. Now is a great time to talk about earnouts and claw-back provisions if there’s a drop in performance post-closing — things that allow the buyer to acquire the company with less risk.
What does a seller need to consider these days given the circumstances?
It depends on the strength of the seller. If it’s a seller that has not been impacted negatively by COVID, then they need to keep the pressure on the buyer and not fall into the (scenario of thinking), ‘These are hard times. We need to take more time.’ They need to set an expectation that it’s going to be business as usual for the sale of the company.
If it’s a business that has been impacted, they need to understand what the impact is going to be on the value and decide, ‘Is this now still the right time (to sell)” depending on what that impact on the value is. If it’s a business that has been impacted severely and they’re distressed, then they need to probably be thinking about how they can accelerate a sale in order to stop the bleeding and work with their bank. I have some distressed deals right now where the bank is driving everything.
For business owners who decided to sell during the crisis, what’s the best thing they can do to position their companies to attract the attention of a prospective buyer?
Any time you’re selling a business, whatever you can do to differentiate from other sellers in the market, that’s good. If you have a business that’s not been affected by COVID, that’s something that I would be pushing strongly.
If sellers decide to wait six months or a year before going to market, what should they spend their time doing to better position their companies?
Early on, everybody was saying this is a great time to work on your marketing and a great time to renew your networks of people. I think they need to make sure that they understand the metrics they need to be watching to determine what impact this is having on them, and if they don’t know what those metrics are, they should learn them so that they can monitor their business (and) monitor the financial health because buyers are going to want to know that. If you take the company to market and you haven’t thought that through, you’re not going to look very good to buyers.
Do sellers need to temper their expectations during the crisis?
If you are a business not impacted but COVID, I say no, but if you are (affected) — absolutely.
Do you see some buyers coming in low with their offers because of the pandemic and what it’s done to the economy?
I think they’ve got to be cautious about overpaying. There’s opportunism in a good way, and opportunism in a bad way. There are going to be both. There are a lot of sellers that just are going to be taken advantage of because they don’t have any leverage anymore, but there are going to be a lot of opportunities for buyers that are looking for businesses that, with the right leadership and the right backing, can do very well. I think there will be great opportunities for buyers out there.
It’s been a seller’s market for a number of years. Is it transitioning to a buyer’s market?
That’s hard to say. I don’t see that right now. Ask me again in a year and I may have a different answer, but at this point I don’t see it shifting.
How do you see deal flow holding up for the rest of 2020 and into 2021?
It’s really going to depend a lot on what happens with restrictions. If the restrictions continue to ease and the second wave doesn’t hit like people are worried about, I think deal flow will pick up quicker. If the restriction easing gets paused or the more severe restrictions get put back in place, it’ll slow deal flow more.
Based on the transactions you’ve been involved with, what is the availability of credit to finance a deal?
I haven’t heard anyone say that they can’t get a deal done because they can’t find the capital. I do think you’re probably going to see more seller financing involved just because if you’re a buyer, you want the seller to continue to have some skin in the game just in case we continue to have road bumps post-COVID. I do think the number of deals that include seller financing as a percentage of the purchase price that’s being financed by the seller is probably going to go up. But I don’t think it’s necessarily because they are unwilling to loan. Maybe banks may demand that sellers take more of the debt. From a buyer’s perspective, that’s what I would want to do. If I can’t get an earnout, I want seller financing as much as possible so that the seller is invested in helping me weather the storm post-COVID.
Many small businesses are holding PPP loans or Economic Injury Disaster Loans the U.S. Small Business Administration offered to provide relief from the pandemic. How might those affect deals?
I’ve had a number of deals where clients have said, ‘Well, if we do this as an asset sale, can we assume that debt?’ because the terms are really good. I have not seen that happen yet, but I have clients who are looking into doing that. ‘If we do a stock sale, does that trigger a repayment obligation if there’s a PPP loan or an EDIL loan out there?’ I’m not sure there’s any clarity on that answer yet, but people are trying to figure out what the impact of the loans is on a deal, and if they can avoid paying that off at closing.
What’s another issue that has arisen during the pandemic?
I have seen more stress in small companies where one partner wants to get out and the other doesn’t. We’re looking at partial buyouts (and) partner buyouts. We’re seeing a lot of that activity right now.
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