What a rollercoaster it’s been! Brexit and election uncertainty, a clear election result, a promising start to 2020 and then Covid-19! While the shock of lockdown has undoubtedly caused a hiatus in M&A, conversations I’ve had reveal a range of views regarding the outlook:
- Some deals are still proceeding (especially where lockdown has boosted results), meanwhile dealmakers talk of other transactions on hold, with prices (at the moment) holding firm. There have also been concerns about future dealflow.
- On the other hand, I’ve seen talk of some owners thinking about selling, keen to capitalise and change their work/life balance – even if they have to accept a lower price. I’ve also seen talk of buyers seeing big upsides (when markets shakeout) and a suggestion that sellers may able to hold firm on price.
- Most recently I’ve heard of some small green shoots.
No doubt the reality will depend on specific circumstances and attitudes. However deals WILL happen – and in this challenging environment, dealmakers will be truly earning their fee. Here I consider the due diligence perspective.
Doing deals in 20/21
The business landscape has changed dramatically, with increased risks (eg: to supply chains and income streams) and the prospect of changes to some business models. Whatever your view of the M&A market, general uncertainty is likely to weigh heavily.
With general business support high on their agenda, banks may have less appetite or bandwidth for M & A funding. Earn outs and deferred consideration could be more prevalent.
The buyer’s point of view
Buyers will want to form a view on the current shape of the business and its prospects; also changing models may create extra risks. There could be deeper due diligence, including:
- Stripping out super profits where businesses have benefited from lockdown.
- Forecasts, which are more likely to be required and to be closely examined.
- Greater analysis around the top line and margins, including trends.
- Consideration of the impact of changing business models.
- Lockdown related risks, such as:
- Contract disputes and claims.
- Compliance with the terms of government support; eg: have any staff worked during furlough?
- Bad debts, as well as threats to income streams and supply chains.
- People related issues, including health and safety and staff claims.
Also, in a soft market, some buyers could be less forgiving of delays in information.
The seller’s perspective
Last year I was just on the point of starting due diligence for a buyer – the deal included an earnout; the company didn’t normally prepare forecasts and when push came to shove the seller lacked confidence in his forecasts and pulled out! While attitudes to risk may differ, many owners will want to be as comfortable as possible about prospects if they are agreeing to an earn out (or deferred consideration funded by future profits).
Strategic challenges, operational issues and cash flow management will be high on the agenda. While, from a sale perspective, owners should usually be removing themselves from the day to day, I can see that in a difficult climate there will be a temptation to get more involved. And with so much going on in the business, it could be more challenging than usual for sellers to provide DD information quickly.
Other challenges for dealmakers
- In a difficult business environment there will also be a greater chance of something nasty coming from ‘left field’ and derailing things midstream.
- If there is deeper DD, then weak financials could be more problematic than usual.
- With new risks created by the current situation, there may well be a greater chance of problems arising in DD.
- Working capital calculations could also be tricky, not only in terms of assessing normal activity, but also reflecting ‘normal’ trade credit terms.
It may be advisable to:
- Keep deal timelines as tight as possible.
- Think about whether the seller has the required bandwidth and experience to cope with DD.
- Encourage clients to make sure they have robust and insightful management information, including forecasts.
Leaving aside a deal scenario, upgrading the financials is likely to help clients make better decisions and become more resilient.
Personally, I relish the DD challenges that the current situation presents – I would be delighted to provide support, especially in tricky situations. At the same time I recognise that there may be circumstances where transactions need to be deferred while things settle down and the financials are upgraded!
Either way early attention to the financials is likely to be beneficial. I recently wrote a tip sheet with 11 questions to help dealmakers assess their clients’ readiness which could be worth a read. If you’d like a copy then please e-mail firstname.lastname@example.org.
This article is for general information and interest and may not be comprehensive. Specific circumstances will also vary. Neither Camrose Consulting Ltd nor the author accept responsibility for any loss arising from any person or organisation acting or refraining from acting based on information or opinions contained herein.