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How has the COVID-19 pandemic changed the deal process?

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It’s been remarkable to see the rebound in deal activity in the last few months and to observe the M&A process shift to virtual settings.

A few things that we’ve observed:

  • Most or all of the deal process can be done remotely. Most meetings can be done over videoconferencing, and most diligence can be done through email and virtual data rooms. Initial management meetings can be done effectively via videoconference, although in many cases the buyer and seller will want to have an in-person meeting at some point before closing. Diligence meetings can also be done through videoconferencing, with some exceptions such as product demos, facility tours, and inventory counts. While we expect to see more in-person meetings happening in the second half of 2021, some meetings will likely continue to be virtual in the longer term, given the ease of scheduling and travel time saved.
  • Buyers are very focused on the entire financial picture. They want to understand what the company looked like pre-COVID; what happened in the early months of the pandemic, which were the worst for many businesses; and what expectations are for the future. They want to evaluate what the financial performance would look like in the case of a future lockdown, and whether there was any one-time revenue or expense associated with the pandemic. For businesses that grew in 2020, it is important to have data to support that growth as a sustained trend rather than a short-term spike (with supporting information such as industry growth outlook, a strong backlog and pipeline, sticky customer relationships, mission-critical products, etc.).
  • Overall valuations have remained strong for businesses that performed well through the pandemic, but many buyers are looking at earnouts or rollover equity to bridge any near-term cash constraints or concerns about future performance, particularly for companies that experienced strong growth in 2020.
  • In some cases, the process can be slightly slower. Business owners and managers have been very busy over the last several months, dealing with everything from PPP loans to new HR guidelines to staying in touch with virtual employees to supply chain disruptions. That makes it harder to focus on an M&A process. Some strategic buyers may be more cautious and may want to spend more time assessing the fit internally before making an offer.

With buyers anxious to put capital to work, it seems likely that 2021 will be a strong year for M&A.

Kate Soto is a partner with Mirus Capital Advisors. She works with owners of middle market businesses and can be reached at soto@merger.com.