Horizons Fall/Winter 2020

Sellers can be more transparent and accommodating to buyers by conducting sell-side financial due diligence prior to taking their business to market. This exercise will provide the buyer with a clearer picture of the earnings of the business both before and during the pandemic. Sellers should be extremely thoughtful and detailed in their post pandemic financial projections. We suggest sellers detail the actions management will need to take in order to achieve their projections. It is important for sellers to understand that the buy side due diligence team will judge the reasonableness of management's assumptions used in the projection. The buyers will also attempt to test the sensitivity of the assumptions. A rosy future projection on which a deal is agreed upon in the letter of intent can quickly end a transaction if the seller’s assumptions do not hold up to scrutiny. For businesses in severely impacted industries, a last twelve month (LTM) EBITDA number may not be the most important time period to review. In these businesses, buyers will likely focus on certain qualitative factors to determine if the business is recovering, and less on trying to quantify an EBITDA adjustment to reflect the business “as-if” the pandemic did not occur. Removing the impact of the pandemic from EBITDA is a rough estimate at best and is subject to debate. While revenues of many businesses have been negatively impacted by the pandemic, there are also some expenses that are likely lower than usual. The following are just a few examples: ∙ Employee expenses: Such as reduced hours worked, payroll tax credits (one-time reductions), employee lay-offs or furloughs, reduced bonuses, reduced holiday pay, reduced promotions, and temporary reductions in management compensation

...we expect merger and acquisition activity to ramp up quickly [after the pandemic ends]. There remains a significant amount of available capital to do deals.

company has successfully emerged from the pandemic. Finally, most private equity buyers are doing far more add-on acquisitions relative to platform acquisitions, with a platform acquisition being a far riskier endeavor. After COVID-19 As the pandemic ends in the United States, hopefully in 2021, we expect merger and acquisition activity to ramp up quickly. There remains a significant amount of available capital to do deals. Additionally, as the national election begins, it is possible that tax policy may change for the private business owner. As a result, business owners may be inclined to sell near term to take advantage of current tax policy. There will, however, be a contingent of buyers and lenders who will want to wait and see post-pandemic financial results before aggressively pursuing new deals, especially platform acquisitions. Initially, we expect lenders to finance a smaller percentage of the purchase price as well as charge higher interest rates and other fees than before the pandemic. Oftentimes, buyers and lenders will be asking the same question “to what level of EBITDA does the business return?” In the initial post-pandemic environment, many buyers will be betting that an improved economic outlook will lead to improved business results. We believe sellers should do everything possible to make due diligence easier on the buyer.

∙ Abatements of rent expense

∙ Reductions in trade show/conferences and travel expenses

Looking Ahead At Mergers & Acquisitions

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