The following is a blog post written by Nick Kozik, Vice President, TKO Miller.
The coronavirus outbreak has impacted just about every aspect of daily life on a global scale, and middle market M&A is no exception. With half of us in the M&A community doing our best to hold back our inner Patrick Bateman as we navigate a world with no sports, and the other half content making banana bread and frothy coffee while perfecting their yoga skills, I think all of us are united in wondering exactly what COVID-19 means for M&A. Like with many things related to this current crisis, it is hard to tell exactly what the post-coronavirus M&A landscape will look like, other than to say with certainty that there will be changes. So, in the absence of any true clarity on the future, I will do what any good media commentator would do and guess, speculate, and prophesize with ten predictions on how COVID-19 will impact middle market M&A both in the near term and for the foreseeable future.
1. Remote work and virtual meeting will increase
Ok this one is a bit of a softball, cut me some slack. I figured I should start slow. M&A is inherently an industry where a sizeable portion of the work could be done remotely, yet until COVID-19 the industry had not fully embraced remote work to the extent of our tech company and venture capital brethren. Heavy travel, in-person meetings, and face time in the office were all pretty typical when working on a middle market M&A deal. I would imagine that remote work and virtual meetings will become at least a bit more widespread in our industry now that we have all been forced to rely on it during lockdowns. And you know what? In most cases it works exceptionally well. Post-COVID, I could see entire stages of the transaction process that were almost always conducted in person (i.e. management presentations, in-person diligence meetings, etc.) being done virtually in some, if not most cases. That said, I do not think M&A will see a broad shift to remote work anytime soon. The size and complexity of these transactions makes it difficult to truly substitute for the rapport built between parties by meeting face-to-face, or the in-person collaboration of a deal team. However, I think COVID-19 will absolutely show M&A professionals how virtual work can be used efficiently and effectively.
2. Everyone will want to know "how did the business perform in 2020"
Literally right up until early March 2020, when bad news about the coronavirus started to overwhelm the media cycle, there was one question that was basically a guarantee from every buyer in every middle market transaction for the past 10+ years: how did the company perform in 2008? The Great Recession was the benchmark "stress test" for just about every business that was in operation at that time, but by 2020 it was getting a little dated, a bit tired. Well, luckily now there will be a new, fresh low point for buyers to model as their downside case. Going forward, how a business performs this year will likely impact its attractiveness to future buyers. A company that mostly holds performance or grows through COVID-19 will be viewed as resilient and less uncertain, and therefore more attractive as an acquisition. Companies that see a performance dip this year (which, unless you make masks, toilet paper, or adjustable dumbbells, will probably be most) will need to explain and justify the downturn to get buyers and lenders comfortable with the downside risk (just like they have been with 2008 performance for over 10 years). It is safe to say that "How did the business perform in 2020?" will be a question that sellers and their advisors will be fielding for the foreseeable future (well, at least until the next disaster).
3. Buyers will see a lot of "COVID-19 EBITDA adjustments" in future deals
If there is one thing sell-side advisors love, it is add-backs. One-time expenses, an owner's Packers tickets, supplier quality issues, tornados, they are all (justifiably) fair game to be added back to improve a company's EBITDA. To any private equity folks reading this, start preparing now because the COVID-19 add-backs are coming. You will be arguing against them for the next 2-3 years, at least. I mean, a global pandemic has got to be just about the definition of a o...
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