Due to the COVID-19 pandemic, we are now in an ever-changing paradigm, which is creating tectonic shifts in our personal lives, businesses and global economy. The current environment involves healthcare workers placing their lives on the line caring for patients, companies shuttering their doors and employees either working from home or being placed on furlough. We are all living in a period of uncertainty, and it is unclear as to when and how a sense of normalcy will return for us all.
For business owners and executives, whether they are thinking of an exit in the near future or not, there are many areas for consideration during these challenging times. As this situation evolves, we want to offer our perspectives to business owner and management team relationships, trusted referral partners and friends. Ultimately, as a friend of Bundy Group recently said, “we are all looking to help each other out in any way possible.”
Prioritize the health and safety of all your company team members, from the shareholders down to the individual employee. These individuals are the assets of your organization, and they won’t forget your continued efforts to protect their health, safety and job!
Fortify your company’s balance sheet to the best degree possible. Evaluate your expense burn and the strength of your company’s cash position. “Cash is king” during a recession. If possible, try to procure a loan from your bank or extend an existing line of credit in order to provide access to additional liquidity.
We would encourage all businesses to evaluate the just passed CARES Act to see if they qualify for government assistance during this challenging time frame. There are good resources to review on this legislation, but your best starting point will likely be your existing commercial bank. Those businesses that are prepared with loan documentation, and are vocal with their commercial banks, stand the best chance of receiving funds. Based on the feedback we have received from our commercial banking relationships, the government and the banks are furiously working to make loans available. This is one resource that explains the CARES Act and provides additional information: The Small Business Owner's Guide to the CARES Act
If your company has the time and ability, help contribute to the COVID-19 fight in any way you can. Examples of current contributions include companies retrofitting their operations to produce needed protective gear for healthcare workers and businesses donating meals to hospitals and testing facilities. In addition, many other companies continue to operate on normal schedules in the midst of this pandemic in order to provide essential goods and services.
For business owners and management teams who are evaluating the “go-forward” strategy in this dynamic situation, the Bundy Group team wanted to offer some specific thoughts.
Unlike anything we have ever seen, we are entering an economic recession deliberately created to protect lives. The anticipation is that once the COVID-19 situation is under control, the economy will restart and do so quickly. As Dr. Tony Fauci, Director for National Institute of Allergy and Infectious Diseases, recently stated, “You don’t make the timeline; the virus makes the timeline.” That being said, many business owners and executives we have spoken with are anticipating weak performance in the second quarter of 2020 followed by a resurging economy sometime in the third and fourth quarters. Certainly the hope is that once the COVID-19 situation is under control, then the economy will reboot relatively quickly and a significant amount of pent-up demand for goods and services will be released.
Mergers & Acquisitions and Capital Raise Markets
Consistent with their reactions during other periods of economic shocks, strategic and private equity buyers have quickly become much more selective on where they will deploy capital for acquisitions. A number of these players will elect not to pursue acquisitions for now and instead focus on existing operations and portfolio companies until there is more certainty in regards to COVID-19. Compounding the change in the Mergers & Acquisitions (“M&A”) market are recent challenges in the debt markets. With so many companies rushing to get new loans or extending lines for credit, it makes it more challenging for a buyer to obtain acquisition financing in order to consummate a transaction.
Bundy Group is currently seeing a “flight to quality” in the M&A market, meaning that seasoned strategic buyers and private equity investors are gravitating to acquisitions where companies are not only recession resilient but are also deemed “virus proof.” As an example, Bundy Group is representing a pharmaceutical services company in a sale, which could assume new clinical trial testing opportunities for treatments related to COVID-19. Strategic and private equity buyer interest in opportunities of this nature will remain strong, regardless of the impact of COVID-19 on the M&A market.
For those companies considering a future sale or recapitalization that will be negatively impacted by COVID-19, we believe that strategic and private equity options will resurface relatively quickly after the virus is under control. Some business sale processes are being placed temporarily on hold until the COVID-19 threat has been tamed, with the tentative goal of restarting buyer conversations later in 2020. In other situations, business owners and management teams may need to be more patient before formally exploring a sale or recapitalization.
In what we hope to be a rapidly recovering economy, we anticipate that strategic buyers and private equity groups, both of which still have a significant amount of capital to deploy, will be searching for new ways to acquire growth and invest. As advisors to business owners, Bundy Group would always prefer for owners to speak with strategic and private equity buyers from a “position of strength.” How long a business should wait before formally pursuing those options is dependent on many factors related to each individual company.
In summary, many business owners we have spoken with are planning for a deep, relatively short recession, which will hopefully then be accompanied by a return to a more stable market. Many strategic and private equity buyers will be more prudent in their acquisition strategy for much of 2020, as “virus proof” businesses will garner a significant amount of attention in the M&A landscape over the next few months. As advisors to business owners and senior executives, Bundy Group recommends that owners stay informed on current events, take steps to protect the well-being of their employees, do their best to fortify company balance sheets and continue to strive to build value in their companies.
Please don’t hesitate to reach out to anyone on our team should you have questions.
Stay safe and healthy!
The Bundy Group Team