There was little activity in the merger and acquisition market from March through July. An occasional transaction was completed. But there was also a lot of uncertainty as companies were hit by the crisis. These are not the best conditions to start a sales process. Some sectors actually peaked in sales and results; they had to pull out all the stops to keep up operationally. Not a good basis to start an acquisition process either.
Marketability of companies depends heavily on the sector
During spring and summer there was uncertainty about market conditions and expectations about the future within the merger and acquisition market, but there is increasing confidence. Sectors that are – not surprisingly – doing well include e-commerce companies, ICT companies and garden centers. They are currently doing a lot better than companies heavily affected sectors such as tourism or hospitality.
But large differences were also visible within a sector. Take the clothing sector, for example. A clothing chain that relies heavily on its stores is more likely to have a drop in results due to fewer arrivals during lockdown. Other clothing chains with a good online strategy experienced the consequences less.
Moreover, the question is whether the increase in sales is sustainable. For example, is the increase in results of a do-it-yourself chain a powerful rebound because we have massively adopted DIY as a new hobby, or will sales decline after this anyway?
Whether a company is marketable and attractive to buyers in these times depends not only on the market in which the company operates but also on other factors such as an online strategy and flexibility in operations.
Buyers are looking outwards again
Many potential buyers have analyzed their operations during this period and may have adapted their business model to the new situation. Risks have been better identified.
Our practice shows that there is now more and more room for buyers in the strong sectors to look for strategic acquisitions. There is still plenty of cash available. This can be used to make acquisitions. Especially if these acquisitions precisely broaden the company’s activities or markets.
Private equity sorts itself out
This same phenomenon also plays out with private equity firms. They were initially analyzing the financial health of their own portfolio companies and making adjustments to their business models. But soon it also became apparent that parts of the portfolios were actually doing much better. Now that there is more and more clarity about the future, we see that private equity has more time and resources available to invest again. After all, the coffers are still well filled.
Sellers sorting for recovery results
For sellers, it is nice that there are enough buyers active again. An important condition for a successful sale, however, is that the seller is active in an attractive market and that he can well substantiate the operating results. A lower profit in 2020 is not a problem here provided it can be demonstrated, based on good arguments, that this is (largely) a one-off. An average acquisition or sales process often takes between four to nine months. This gives the seller enough time to demonstrate to the buyer that the results are recovering in the course of the sales process.
The assumption here is that the economic situation, as well as the merger and acquisition market, will improve by 2021. Starting preparations for the sale now is therefore a smart idea. This means selling on a well-founded forecast for 2021, and thus a good price for the company.
Would you like to have a non-binding discussion with us about the saleability of your business in these market conditions, the possible valuation or what you can do to prepare your business for sale?
Then call Clifton Finance: Gonneke van der Lee +31 6 52466518 or Maarten Vijverberg +31 6 55853074.