How to Get a Deal Done During COVID-19: Perspectives

As businesses continue to adapt to COVID-19, so does the process and focus on M&A activity in this new environment.

Here are the key takeaways:

Conducting Due Diligence

The most notable changes in how due diligence is being conducted in a non-face-to-face environment are:

• An increased level of focus placed on stakeholder communications to gain a better understanding of the management team.
• The new importance of a company's ability to pivot, be resilient and navigate through change.
• Looking beyond profit margins and the financial ratios of a business. Potential buyers want to know how the key functions of a company will continue running smoothly through business disruption.
• The basics of legal due diligence have largely remained the same, but there are new in-the-moment COVID-19 issues to consider. Employment wage subsidies from the federal government need to be recognized as audit risk, and there are new workplace risks in maintaining safe environments for employees and customers. Privacy issues, contact tracing and benefits coverage need to be considered as well.

Financing Deals

There are positive indications that buyer interest is returning, much of it now is sector and situation-specific. Businesses that held up well during the pandemic are in high demand. Companies that have benefitted from COVID-19 also attract interest—but there are issues about post-pandemic sustainability in terms of performance. For companies that have struggled during COVID-19, especially in the industries that have been hardest hit, it is tougher to do deals right now. In the near-term, M&A activity will likely be driven by willing sellers more than buyers.

Other trends include:

• The structuring of deals is more conservative right now. There are more earn-outs in mid-market deals to help address the uncertainty of future performance.
• Financing is more conservative, with more equity and less debt.
• Looking ahead, expect to see more vendor financing, with both debt and rolled equity.
• Rolled equity is popular now in the private equity market at any size of the transaction. Rolled equity serves a strategic role in incentivizing management and founders.

Normalizations and COVID-19

When it comes to normalizations during COVID-19, for many lenders it comes down to the strength and tenure of their relationship with a management team. Lenders that truly understand a company's business and the challenges it is facing are more likely able to help with normalizations.

The biggest challenge with COVID-19 normalizations in M&A is that we are still experiencing the impacts of the pandemic. Some buyers are more receptive than others to normalizations right now. Evidence of a strong economic recovery will help support the case for COVID-19 normalizations. Without this, it will be a tougher sell.

Normalization adjustments have to be explained clearly, with what happened and why, and they need to be quantified.

Technology and Overcoming a Non-Face-to-Face Environment

There is no question that buyers and sellers miss the face-to-face that comes with sitting across the table from each other when making a deal. But the M&A sector is adapting to getting things done with fewer in-person meetings. Being resourceful will be key to working through the pandemic world.

Management meetings are being held online and can be efficient and effective. Site tour videos are being shot and shared with interested buyers. Recent experience has shown that the bulk of transaction due diligence can be done remotely. Sales processes will keep adapting and the best practices of virtual deal-making will likely become a new part of doing M&A in a post-pandemic world. On the other hand, recent experience has also underscored the lasting value of creating personal relationships as part of successful deal-making.