The answer is yes — but with certain caveats.
As of this writing in early-May, the length and ultimate severity of the current public health crisis remain unknowable. However, the impact that it has had on our economy over the past two months leaves no doubt that it will continue to have a major impact on business transactions, just as it has impacted everything else.
For owners interested in selling their business, there the prospects are not as grim as they may seem. For one, many long-term investors such as those backing Eagle Peak Capital Partners take solace in the track record of the American economy, which has its ups and downs but has proven to be resilient over time. Warren Buffett spoke to this point during his virtual annual meeting this past weekend. Additionally, there is still a large amount of capital that has yet to be invested, including almost $1 trillion available for buyouts. This distinguishes the current crisis from the 2008-09 Global Financial Crisis, as does the continued availability of debt. That's the good news.
Yet there have been relatively few business transactions of late as many buyers take a "wait and see" approach. Here are some of the reasons why things have slowed down:
It's not easy to determine a fair value — This is a challenge in the most 'normal' of times (see related post), but it is particularly challenging right now given the wide range of potential economic outcomes, which range from a fairly quick recovery to a prolonged depression. Values from earlier this year are no longer valid, as they do not account for the increased risk present today. Additionally, buyers will be sizing up businesses in a different way than they had previously, focusing more of their attention on metrics such as cash reserves than on growth potential than they had prior to the crisis. Over time, the process of price discovery will unfold, and the market will shed light on reasonable valuations. This happens quickly in the stock market but will likely take a period measured in months when it comes to private companies, and in the interim will make it more challenging (though not impossible) for sellers and buyers to agree on a price.
Risk — Just as sellers must agree to a reasonable price, they will also face the additional challenge of agreeing on how to share risk, so the terms of deals in this new environment may be different from those involving deals that occurred just a few months ago. These largely come in the form of downside protection for buyers and take the form of provisions like earn-outs and seller notes.
Mindshare — Many investors and banks are spending much of their energy managing the businesses and loans they currently oversee. This alone does not preclude a deal from occurring — after all, deals are how they make money — but it means that the transaction will have to be that much more appealing to gain their attention.
Eagle Peak Capital Partners and its investors remain committed to acquiring and managing a single, great business, just as it was prior to the crisis. Please visit eaglepeakcap.com/resources for additional seller resources and feel free to reach out to rknauer@eaglepeakcap.com or fill out the form below if we can be of help. Thanks, and stay well!