Bennett Jones
Written by Ian Michael
As businesses continue to adapt to COVID-19, so does the process and focus on M&A activity in this new environment. I recently moderated a panel on How to Get a Deal Done During COVID-19 at the Business Transitions Forum East Conference 2020, which looked at some of the key business and legal issues companies are dealing with in M&A.
I was joined by:
- Jason Sellakumar, Associate Director at First West Capital in Toronto. First West is a Canadian capital provider that offers junior capital to Canadian mid-market businesses.
- Ian Macdonell, Managing Director at Crosbie & Company in Toronto. Crosbie is an independent, long-standing corporate finance and M&A advisory firm, focused on the mid-market.
Here are the key takeaways from the panel discussion.
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 who the management team.
- A 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 an 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 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 less in-person meetings. Being resourceful will be a 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.
If you have any questions about how to get deals done during COVID-19, please contact a member of the Bennett Jones Mergers & Acquisitions team.