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Effect of COVID-19 on Mergers and Acquisitions

COVID-19’s Impact on Mergers & Acquisitions

From the corner suite to the corner store, every sector of the marketplace has been dramatically affected by COVID-19. Hardly anyone saw it coming, and no one could have predicted the unprecedented economic reaction that followed.

But that’s not telling you anything you didn’t already know.

Even though this has been the first pandemic for most of us, we’re all pretty clear that it has been a big deal.

One question posed by many of our clients is:

How has COVID-19 affected M&A (Merger & Acquisition) activity this year?

To answer that, let’s step back in time:

In March, (just days after COVID-19 had been officially declared a pandemic and a national emergency) we introduced you to a research company we use called GF Data. They provide us with a good source of reliable external information regarding M&A transactions.

At that time, the most recent reports we had from GF Data ended with information from December 2019 when the impact of COVID-19 wasn’t yet upon us. While the World Health Organization reported on “a cluster of atypical pneumonia cases” in Wuhan, China in January 2020, the long-reaching effects of a pandemic certainly weren’t on anyone’s radar in the business world then.

At that point, we were looking at EBITDA market multiples around 6x-8x on average.

Returning to today:

The most recent M&A Report from GF Data–released August 2020–includes some interesting YTD statistics that do include the past several months of COVID-19. Using this information, we are able to form a more accurate picture of how this pandemic has influenced M&A activity.

COVID’s Effect on EBITDA Multiples:

As you can see from the chart below, 2020’s multiples are largely holding steady compared to 2019. The average still remains between roughly 6x-8x for companies with Total Enterprise Values (TEV) of $10-$100 million. The “big players” ($100-$250 million TEV) are unchanged at 9.5x.

So What Has Changed:

While the EBITDA multiples don’t seem to have taken much of a hit, the volume has.

Survey data from 227 private equity firms shows only 31 transactions completed in Q2 2020. In Q1 of this year, those same firms reported 82 completed transactions.

That represents a 50-60% drop in M&A activity this year, even when late reporting is factored in.

Investors are waiting to see what the M&A landscape looks like when restrictions finally ease. Sellers are choosing to focus their attention on keeping their businesses running as smoothly as possible until the COVID storm passes. Like the rest of the world, everyone seems to be waiting until a better time to venture into big transactions.

Fortunately, all indications at the moment are that once the “For Sale” signs go up again, valuation multiples will still be strong.

Whatever Happens…Southard Financial Will Be Here For You

We understand that businesses are working on strengthening their position and improving their values. A lot of what we do is helping companies get ready to sell.

And when buyers are ready to go shopping, we understand that they’ll want the most accurate information possible. That’s why we stay on top of numbers like we’ve looked at today.

So no matter what…or when—we’re ready. Contact us today to discover what we can do for you.

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