Most M&A transactions have been paused until more certainty returns to the market. For business owners and the capital markets community, COVID-19 is impacting valuations, debt leverage, and the ability to close deals.
While we expect the M&A market to rebound, the speed and vibrancy of a rebound will be industry-specific. In the near term, buyers will begin the process of searching for their next platform or add-on opportunity. As such, they’ll need to understand the impact of the coronavirus on the targets’ business performance, not only in Q1/Q2 2020 but also on future projections.
In preparation, business owners and their management teams should start identifying key performance indicators (KPIs) and metrics that can help to summarize COVID-19’s impact on their business. Key considerations include services, product lines, facilities, or customers that were impacted, the timeline of the impact, and quantifying the financial impact, not only for FY20 but also for FY21.
Documenting and being prepared to address the following questions will result in productive conversations during the transaction process.
1. Revenue trends
- Does the business have product lines or services sold into industries directly impacted by COVID-19?
- If there was an impact, were these impacts primarily due to volume, pricing, or both?
- Did revenue mix temporarily change? If so, is the change expected to continue into the future?
2. Customer pricing
- Were any pricing changes driven by macroeconomic conditions (e.g., vendors who increased pricing)?
- Have new contractual agreements been put in place that dictate new pricing (or volume) commitments going forward? If so, will this yield favorable or unfavorable results?
- How were customers impacted by COVID-19? Did some temporarily close? Do they plan to re-open? What was the impact on sales?
- Are any customers permanently out of business? How will that affect recoverability of amounts owed, and sales going forward?
- Did vendors increase or decrease pricing for products or services? Were those prices absorbed by the company or pushed through to customers?
- Were there supply shortages causing the company to change vendors at more expensive pricing?
- Did the company incur additional freight charges because of current market conditions?
- How will vendor rebates, minimum purchase quantities, etc., be impacted?
- Were in-house operations changed because of COVID-19? Were any services brought in-house that were previously outsourced?
- Were operational efficiencies obtained due to headcount reductions that will continue going forward?
- Will market conditions dictate closing facilities, reassessing the supply chain, etc.?
6. Human resources and compensation
- Were there temporary or permanent changes in head count or compensation, such as furloughs, hour reductions, pay reductions, or bonus/incentive compensation freezes?
- Were there temporary personnel or subcontractors brought in to replace workers who were sick or in self-quarantine?
- Did the company close facilities and pay their hourly employees during the closure? Were there onetime costs incurred because of this closure?
- How have the government relief packages impacted the company’s ability to disburse payroll?
- Has the company incurred higher-than-normal levels of recruiting or training costs, especially if the business had to lay off staff and then re-hire staff?
- Did the company experience challenges and incur expense in hiring back its work force?
7. Rent and facilities
- Were there temporary rent, maintenance, or tax abatements or deferrals?
- Is there an opportunity to or has the company renegotiated more favorable terms?
- Were there capital improvements that were canceled or deferred until a later date? If so, how will this impact the business going forward?
- Were there temporary storage costs incurred due to cleaning of existing facilities?
- Were there higher-than-normal inventory write-offs due to spoilage or obsolescence?
- Has the company reviewed insurance policies for business interruption claims? If so, have these claims been reimbursed, or will they be?
- Has the company revisited policy terms and coverage, resulting in changes to costs going forward?
9. Marketing and advertising
- Were marketing or advertising activities canceled, or deferred until a later date?
- How will the company revisit their marketing strategy to connect with customers?
10. Other areas
- Were there other areas of the business that were impacted by COVID-19 that are not noted above and can be quantified?
- Did the company incur onetime legal, accounting, or consulting fees because of the pandemic?
11. Working capital
- How will COVID-19 impact working capital calculations and targets for purchase price adjustments?
- Are there longer-term permanent changes to overall working capital levels because of changes made to operations, customers, etc., as noted above?
- How is the cash conversion cycle impacted short-, medium- and long-term?
Being prepared will allow sellers, buyers, and their advisors to assess the overall impact of COVID-19 on the target company. This should increase speed to close and help support a productive sales process.
Subject matter expertise
Managing Principal, Value360 Practice
CPA, Partner, Transaction Advisory Services
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