Article written by:
Director of Transaction Advisory Services &
GBQ’s Chief Liaison to Footprint Capital
With a COVID-19 slowdown that lasted through mid-summer 2020, we are now experiencing a dramatic increase in companies seeking deals to create liquidity. So, what is going on? A combination of factors that we will explain:
1) A certain segment of businesses are seeing an upsurge in revenues and profitability as a result of COVID-19, thus increasing their value. Certain healthcare-related companies and home services businesses are two sectors, for example, where we are seeing rising valuations.
2) With interest rates and yields at all-time lows, prices are being pushed up. Just like the stock market, typically in a low yield environment, the value of operating companies and other hard assets are increasing. Housing prices are another example.
3) There are record levels of cash being held in Private Equity (PE) firms (and a lot of strategic companies) to be invested. COVID-19 put a damper on investing in the first half of the year and now PE firms are working hard to deploy cash before the end of the year.
4) The businesses that got through the pandemic in good shape, and perhaps thrived, are in the minority. My guess is that 20% of businesses fit this category. Consequently, there are fewer businesses available for purchase. Supply and demand is at work.
5) There is a general train of thought out there that if the current administration loses the election, there will be tax hikes passed. As such, people seem to assume that if they complete a deal by year-end that they will avoid these higher taxes. That may or may not be true, and if it were to actually happen is also up for debate, however, for many, perception is reality. In the eyes of an owner, if they pay lower taxes upon the disposition of a business, then that is the same as getting a higher value sale price.
In any case, we are seeing a flurry of deal activity being driven by all the above. If you are thinking about a near-term liquidity event before year-end, there may be time if you are selling to someone already in your industry. If you are thinking that you want to run a full process, and that PE is a likely buyer, time may be running out to get something done by year-end.
We are pleased to provide a link to our COVID-19 Resources webpage where you can find a number of articles and webinars available to you as you continue to strategize on next steps and keep current with the ever-changing conditions. As the COVID-19 pandemic continues to present challenges and disruptions, GBQ’s commitment to empowering growth remains our top priority.
Should you have questions about your situation and next steps, we are here to listen and assist.