Having made it through the initial shock of COVID, the questions now are where, as a deal-making community, do we go from here, what factors will get us back to where we were at the beginning of 2020, and how long will a recovery take? These are the questions Sean O’Reilly, CFGI, Jonathan Chou Eureka Equity Partners, and Patrick Dolan, Delancey Street Partners helped to address in the May 14th presentation “What’s Happening Now: How has COVID-19 Impacted Buyer & Seller Valuations"
Recent Perspectives from the Buy & Sell Side
There has been a general shift in focus from sourcing external opportunities to ensuring existing portfolio investments are best able to weather the COVID crisis.
Historically reserved for more distressed businesses, there has been a renewed focus on near-term budgets (i.e. 13-week cash flow forecasts) while also illustrating recent cost initiatives implemented and how operating margins will look going forward.
While not fully established yet, initial indications are that COVID-related adjustments to operating performance will exhibit a large range.
The appetite from lenders is pretty low for any new deals with primary attention being given to their existing portfolio. As such, buyers may need to be open to alternative financing arrangements.
In this environment, broad auctions will be difficult, and buyers need to be open-minded if there is an opportunity they do not want to miss. It is likely a buyer will need to possibly over-equitize an acquisition up front and seek out a recapitalization at a later date when the lending market improves. Additionally, the lack of debt financing can be used by buyers as a rationale for a less aggressive purchase price multiple when dialoging with sellers.
While there has been a general decline in valuations, some industries have fared better than others.
For those businesses struggling during this time, goodwill and long-lived impairment testing has become more prevalent and is anticipated to increase during the second quarter and at the end of the year.
While investors are sitting on a lot of cash, this period of uncertainty has created much apprehension. There is a general expectation of a gradual recovery through the end of 2020, but it will be much longer to get back to where we were pre-COVID. The health risks associated with the virus need to be under control before both buyers and sellers truly feel comfortable enough to get back to pre-COVID valuations. Those first to rebound will be the few which have thrived during this COVID era.