The COVID-19 pandemic is having and will continue to have a significant impact on the business merger and acquisition (M&A) world. Whether you are a large company struggling to maintain operations due to smaller gross margins while maintaining your compliance program or a small business considering selling in the next few years, COVID-19 has had an impact on business valuations. A recently published Forbes article titled “The Impact of the Coronavirus Crisis on Mergers and Acquisitions” states, “On a massive scale and in a very short period of time, hundreds of thousands of businesses have shuttered or cut back their operations significantly, millions of workers have been laid off or furloughed, consumer spending has been drastically reduced, supply chains have been disrupted, and demand for oil and other energy sources has plummeted.”
These operational cutbacks impact a company’s valuation when selling. The COVID-19 pandemic is different than prior economic crises because it did not only impact the financial sector of most businesses, but it has also impacted the buyer’s urgency and need to grow. Going forward, over the next few years, many additional factors will play into an acquisition impacting the due diligence process. These factors include the new pricing models and valuations which were given an uncertain future in some industries, the need to assess all risk in acquiring a business, and the numerous regulatory changes that have occurred across many industries, in particular healthcare. Many of the prior metrics utilized to assess a business or practice will no longer be relevant in the new normal. Many of the interim business processes that were put into place during this COVID-19 pandemic, to allow many businesses to function more virtually, may remain the new normal. However, the viability and valuation of these strategies long-term is not yet known.
As the economy continues to evolve, one thing that will remain consistent is the continued exploration of buying and selling and the base M&A tenants required to undergo a successful M&A. Businesses looking to strategically grow will always look at valuation but will not lose sight of the compliance risks when considering a purchase. Businesses should consider the following:
- Have a plan in place to prepare your option to sell in the future.
Do not be afraid to invest in external help in this area. Accounts receivable, business processes and practices, and business partnerships are just a few areas which will come under the microscope. These realms assess the financial risk, but more importantly, may also identify possible malalignment of values and missions.
- Tighten up the policies and procedures that support your compliance program and contractual payment liabilities.
Many capital investors or acquirers conduct due diligence on accounts receivable (AR) and allowable payments, to assess lost revenue risk potential into the future post-purchase. Working closely with an external consultant or company can give you an objective perspective on your business’ valuation or need to escrow dollars in case an audit occurs in the first few years post-purchase.
- Know and follow past and current regulation expectations for your business.
Not knowing or following regulations can pose an immediate red flag to a potential buyer, who may request more work on your end. More work usually involves more legal expenses during due diligence. One way to mitigate this risk is to consider having a compliance program assessment conducted by an external consultant, several years prior to when you are planning to sell. Being able to demonstrate an effective compliance program allows a purchaser to save money in the long run.
If your plan is to position your business for a sale in the next few years, now may be the perfect time to assess your business for acquisition. Due to the effects of COVID-19, many of us have some additional time on our hands; why not spend that time assessing the key business risk areas which impact current and future valuations. If you are interested in discussing this further, please do not hesitate to contact LW Consulting, Inc. .
For more information on M&As and how LW Consulting, Inc. can help, contact Deborah Alexander at 717-213-3122 or email DAlexander@LW-Consult.com.