Business mergers & acquisitions: The questions on buyers’ lips

In these unprecedented times, buyers are keen to know how your business has responded to the COVID-19 crisis and, looking beyond, what its prospects for success are. We look at the key questions that acquirers are asking, as part of their due diligence.

Overview:

  • Merger & acquisition (M&A) deals continue to go ahead, in spite of the pandemic.
  • Potential buyers are, however, likely to have further due diligence to complete ahead of purchasing a business.
  • Buyers expect to have an understanding of how your business has performed during the pandemic, what the future business prospects are, and what level of government support was used due to the pandemic.

Good-quality merger and acquisition (M&A) deals are still proceeding, despite the pandemic. However, buyers are understandably posing questions about how companies have reacted to COVID-19, and what their prospects for success are once ‘normal’ life has resumed.

Andrew Shepperd, Co-founder of business broker and corporate finance advisory firm Entrepreneurs Hub, shares his thoughts:

“There are two things you might assume. Either that deals aren’t being done or, if they are being done, they are opportunistic deals. But, actually, what we are finding is that good M&A is happening, good acquirers have still got strong balance sheets and they are acquiring in a very responsible way.

“The obvious question is, ‘are they cut-price deals that are unfavourable to the vendor?’ And the answer is ‘no’.”

Potential buyers usually have three important questions related to COVID-19, as part of their due diligence, he adds:

1. How have you performed through the pandemic?

Shepperd notes that acquirers are generally very considerate of the fact that companies have come up against various challenges during the crisis. They actually now feel more confident about the businesses they are buying in many respects, as those that are still trading have already proven their resilience.

Contracted revenues are expected through the worst months. They also want to have an awareness of what business was like pre-pandemic, and what it will look like in the months to come. They are essentially looking for a trend line that will help them to make a valuation based on business norms, as opposed to the low lockdown period.

“They will want to understand what the pandemic was like for you. What did it feel like in the business? What did your customers do? What did you do with your staff? They’ll also want to know whether you kept operating fully or closed down, how you maintained customer obligations, what happened to your cash, did your projects pause or get cancelled altogether, did you pick up different kinds of work, and was the size of your orders bigger or smaller than normal?” says Shepperd.

“Overall, they are looking for the colour that will give them a clearer understanding of your business,” he adds.

2. What are the prospects for the business?

It goes without saying that acquirers will want to understand how you plan to be successful beyond the pandemic. If your products have been in demand during the outbreak, how will you sustain sales? And if you changed your business model in order to produce products such as hand-sanitisers or masks, is demand likely to remain? If not, how will you revert to your previous business model?

Acquirers will also seek to understand how you’ve adopted the digital transformation to meet the demands of a modified business environment. Many acquirers, especially those in the technology sector, are enquiring about a target company’s cloud strategy and how they are addressing customers’ problems through the cloud, adds Shepperd. They wish to know about online information, online ordering, support, and how online orders are fulfilled.

“I’ve seen a number of businesses that I work with, and these are privately owned SME businesses, whose revenues have gone through the roof by going online. If you went back 10 months ago when COVID-19 was starting and some of their traditional customers and traditional ordering and fulfilment were jeopardised, revenue flows were highly disrupted. By going online not only have they recovered but they have grown more quickly.”

3. To what extent did you use government support?

While acquirers want to know whether you took advantage of the Job Retention Scheme, the Coronavirus Business Interruption Loan Scheme or the Bounce Back Loan Scheme, they also want some awareness of how these are reported in your books.

If you did make use of this support, it is not viewed as a negative. If anything, it is often seen as good business sense, since the loans were offered on extremely favourable terms and could be used to finance expansion. Businesses are, on the whole, considered to be resilient if they managed to continue trading through lockdown, but acquirers will want some reassurance that your success doesn’t rely on government support.

“They are assuming that businesses have taken the support and generally acquirers are very supportive, says Andrew. “They just want it reported clearly. Generally, it is broken out onto a separate line of your profit and loss report and they are fine with it.”

Finally, don’t be taken aback if an acquirer asks you how you truly are! One good thing to come of the pandemic is that something of the human touch has returned to mergers and acquisitions, says Shepperd. He has witnessed genuine concern from acquirers for business owners, as they recognise the sheer pressure they have been up against this past year.

The opinions expressed by third parties are their own and not necessarily shared by Wellesley Wealth Advisory or St. James’s Place Wealth Management.

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