COVID Impact: Moving Forward Advising Clients on M&A and Financing

What strategies should your firm be considering to not just survive, but thrive in the current economic climate?

One viable option is to expand your advisory services, not only because there are many advisory opportunities out there, but because the consequences of not offering advisory services could be significant. For example, if COVID has negatively impacted your regular revenue flow, then maintaining your pre-COVID revenue strategies could result in a continually decreasing revenue stream. Other consequences of not offering advisory services include:

• Losing clients to firms that do offer advisory services
• Difficulty recruiting and retaining partners and staff
• Becoming irrelevant in the marketplace
• Finding yourself without a succession plan and no choice but to close your office

Prior to 2020, the M&A market was robust. The top challenges were:

1. The significant amount of time it required, and
2. Finding quality companies to acquire.

COVID Impact on M&A Deals

When COVID hit in 2020, it also hit the M&A market. A survey of over 2,000 firms revealed that 40 percent of deals in process were suspended, and 14 percent were terminated. The average drop in total consideration for deals that closed during the crisis was 12 percent, and went as high as 23 percent, depending on the industry. Deals that remained active had an average valuation loss of 14 percent and went as high as 24 percent. At the time of the survey, 60 percent of respondents reported one or more new deals since February, and 40 percent had no new deals since that time.

Survey respondents agreed that companies looking ahead at the M&A market should prepare for 12 to 18 months before a return to pre-COVID M&A activity. It remains difficult to find quality firms to purchase, but there is still plenty of cash available. At the same time, sellers should be prepared to be more flexible, and buyers will need to have more of their own cash in the deal. Additionally, the diligence process has become considerably more complicated.

Opportunities

As we look to the future, CPAs have at least three distinct opportunities to pursue:

1. Help your clients sell or grow by buying
2. Bring someone on or appoint someone in your firm as a champion of valuation
3. Provide quality of earnings reports to your selling clients

Not sure what a quality of earnings report is? Here is a brief overview:

• The purpose of the report?
• To normalize the earnings
• What should be included in the report?
• Nonbusiness, nonrecurring expenses and costs that are included in a company’s profit and loss statement and balance sheet
• Expenses that should have been capitalized but were expensed
• Excessive owners’ salary
• Any extraneous expenses that would add to the normal and necessary expenses of running the company
• The goal of the report?
• To determine what normal earnings would look like had the company been run without unnecessary expenses or costs that would be unique to the current owner or situation

Avoid These M&A Mistakes

As you advise your selling clients in the M&A market, be sure to help them avoid these deadly mistakes:

1. Being unprepared for sale

• The financials aren’t audited
• The management team doesn’t have an agreement to stay
• The business hasn’t spent the money to prepare the needed statements, maximize the value of the firm, etc.

     2. Allowing a breach in confidentiality

• Buyers should sign an NDA
• Financials should be kept confidential until the end

     3. Adequate financing and structure are not in place

• Smaller deals should have SBA-backed lending in place, a seller note, and reasonable seller terms
• Larger deals should have senior debt by acquirer, a seller note, and seller reinvestment.

     4. Due diligence documentation is overlooked or poorly handled

• Use a secure data room
• Do not share information or email it
• Limit how much time any person spends with the data
• Be aware that due diligence expectations now extend into financial, legal, HR, IT, and environmental

Phil Whitman is president & CEO of Whitman Business Advisors. and Anthony Citrolo is managing partner at The NYBB Group.