M&A Update: A Whole New World

By Dennis Boone

A new update on the Kansas City M&A market issued by one of the leading firms in that space confirms what most might have anticipated: That space today is much different than just a month ago. 

So concludes the leadership at O’Keeffe & O’Malley, which says that unlike the 2008 recession, which was caused by subprime mortgages, today’s pandemic is the cause of the financial downturn and potential crisis.

Another significant difference, the firm wrote, is that after the 2008 recession, only major corporations received government assistance, whereas today, the SBA is offering a Paycheck Protection Program aimed at helping companies retain employees on their payrolls.

“If this crisis if remains short-term, M&A should bounce back quickly for businesses whose earnings return to normalized levels on a month-to-month basis,” the firm said in a release. “A full year of normalized earnings shouldn’t be necessary to establish a business’s true value. This is an unprecedented, extraordinary event that may require carving out a few dead months of losses from one’s financials. Businesses that have not been impacted negatively by the epidemic should move forward to sell once there is clarity in the marketplace.”

As in 2008, the release said, there will be buyers looking for good underperforming businesses to buy. However, sellers may not want to sell if the value of their business remains low after business-as-usual returns.

Heading into March, activity was riding near the crest of a two-year high, with, high valuations and favorable interest rates and capital gains tax rates. Most of that activity has been put on hold, with some letters-of-intent canceled outright and a few still moving through due diligence.

The firm recommends that business owners continue to focus on driving company earnings and prepare timely monthly financial statements for their businesses. That includes isolating expenses specifically associated with the crisis, regardless of whether the business was hurt from the pandemic.

“When the market comes out of this crisis, these extraordinary expenses can be recast out of the adjusted earnings,” the firm said. “And if the business has just a few months of extraordinary negative activity, the months of sales and earnings can be removed from the trailing 12-month income statement and annualized or reconstructed in a logical manner to satisfy a buyer.”

It also advised owners to take steps to ensure that key personnel remain in place, and to execute non-disclosure and non-solicitation agreements where appropriate.

Longer-term, the firm said, “owners who survived the 2008 recession and now endured the current one may be ready to sell to avoid the risk of a future crisis.”