Our Transaction Advisory Services (TAS) practice kicked off 2020 coming off of our busiest year in 2019. However, while ramping up in January and February, COVID-19 hit. I had just finished a week’s tour of Pittsburgh, Columbus, Cincinnati, and Indianapolis when I started to experience unusual symptoms: severe headache, dry cough, loss of smell, and a feeling of exhaustion. At the time, I did not know what it was but thought the symptoms were out of the ordinary. It was only a short time later that I realized that I most likely had COVID-19. Shortly thereafter, we were instructed to work from home, which I assumed would last about a week. Sound familiar? That was the start of perhaps the craziest year in my life.
Footprint Capital was able to close one deal right as the shutdown occurred. (Fortunately, the company involved in the transaction has performed very well since that time.) As time went on throughout the first and second quarters, things seemed to go into a deep freeze; we all wondered what we were going to do. Luckily, we started to become very skilled at Zoom and Microsoft Teams and, like everyone else, discovered the virtual world and a new way of doing business.
Fortunately, the deal world woke up from its hibernation about mid-summer, and the third and fourth quarters became very busy, almost as if people were attempting to make up for lost time.
So, what else did we observe in this crazy year? By mid-summer, it became obvious that our industry was going to become even busier than before the onset of COVID-19. Both strategic buyers and private equity buyers were looking to catch up for lost time, and certain sellers were anxious to close 2020 deals to avoid possible capital gains increases due to the impending changes in Washington. (We don’t anticipate this will happen until late 2021, at the earliest, and any tax changes that are passed in 2021 would most likely become effective January 1, 2022.)
Additionally, we started to see valuations rise. Think supply and demand; more buyers looking for fewer deals. Also contributing to higher prices were record low interest rates and certain companies achieving record years due to the pandemic. Valuations in the private markets essentially mimicked what was going on in the broader stock market.
The pandemic definitely slowed down deals, mostly because it took longer for due diligence. The difficulty in traveling and meeting in person slowed things to an extent. The complexity of trying to figure out how COVID-19 affected cash flows (EBITDA) either positively or negatively became a challenge in most situations, resulting in legitimate differences between buyers and sellers.
As a result, we started seeing more earn-out formulas and increased use in seller notes than we had seen in a long time. To help sort out some of these COVID-19 adjustments and essentially get ahead, we saw more use of sell-side quality of earnings reports. There were also numerous discussions regarding how to handle PPP loans that sellers were carrying; different approaches were taken whether it was an asset deal or a stock deal. These seemed to get resolved, though, without much conflict.
We also witnessed a surge in private equity getting into more and more areas than we had seen previously. Healthcare specialty practices like hospice and ophthalmology became prevalent. Certain home improvement areas such as plumbing and HVAC companies saw an increase in activity. Other areas that experienced resilience and an uptick throughout this period included homebuilding, technology, software, business services, food and beverage, construction and niche manufacturing.
So far, 2021 is off to a strong start in the transaction world, and we are hopeful for continued activity. While we look forward to a sense of normalcy in the near future, we invite you to look back at our Transaction Advisory Services 2020 year in review, providing insight into our practice, major M&A trends, and more.
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.
Article written by:
Director of Transaction Advisory Services &
GBQ’s Chief Liaison to Footprint Capital