While COVID-19 disrupted businesses worldwide, in the world of mergers and acquisitions things are as hot as ever. By now, many have adapted to a post-COVID outlook and are wheeling and dealing for the future – and the numbers support it. Transaction activity started to bounce back from COVID lows in Q4 of 2020 and has continued to grow. Fourth quarter 2021 transactions were up 32% in the US.
In this article, we will look at some of the top issues for buyers and sellers in the wake of the unprecedented COVID-19 pandemic, and what is driving the resurgence of M&A.
What are the Factors Contributing to the M&A Resurgence?
Many factors are contributing to the surge in M&A activity in this environment. Let’s examine some of the main ones:
- A More Optimistic Outlook
By now, most businesses are recovering from the devastating impact of COVID-19. While variants are popping up and probably will continue to do so, many are now adjusted to “the new normal” and buyers and sellers are beginning to feel optimistic.
- Tax Changes on the Horizon
In the current political environment, it’s possible that capital gains taxes might increase in the near future. That means business owners near retirement might be concerned about the potential for higher taxes and want to sell sooner rather than later.
- Low Interest Rates
Low interest rates, private equity cash, and the cash on corporate balance sheets are all contributing to a high liquidity environment fueling M&A transactions
- Strategic Buyers are Ready
Due to lower M&A activity in 2020 and earlier in 2021, private equity investors have cash to burn and a keen interest in seeing what might be available.
What are M&A Buyers Looking for in an Acquisition Target Post-COVID?
At the end of the day, buyers are looking for one thing: an attractive business. Factors that contribute to attractiveness are companies that have a strong market share, industry position, and growth rate. They are also looking at financial metrics like sales numbers, gross margin, and working capital. Profitable companies are attractive companies. They are also looking into growth potential, infrastructure, and leadership and management.
Along with these old standards, the pandemic has caused buyers to be asking new questions as well. How have they adapted to stakeholder needs during the pandemic? Have they been able to deliver value throughout? Have they improved processes or expanded technology? These are all relevant questions in a post-pandemic environment.
What are Business Owners Focused on Post-COVID?
Much of what we are seeing on the other side is business owners wary of the next crisis or no longer wanting to bear the efforts and risk. A “get out while you still can” mindset, especially if they are at or near retirement. Beyond that, the pandemic has people asking questions about how much they really need. We are also seeing the “vacation home effect” where business owners have enjoyed their flexible schedules and more time at home, and are starting to question going back to their pre-COVID lives.
Before starting the sale process, sellers now have to consider a variety of questions, many of which are pandemic related.
- Have we seen year-over-year improvement in financial performance?
- Did we emerge from the pandemic as a stronger business?
- Do we want to go to market now, or wait and see?
- What comes next for me? For my family?
- Are rising taxes enough that I should sell now?
- What about my personal wealth and estate?
While it’s clear from the numbers that M&A is back, buyers and sellers have to be more strategic than ever when considering M&A transactions. The environment is complex, and the pandemic still affects every part of life. The key is to be strategic, proactive, and engaged in the process.