The coronavirus pandemic essentially served as a real-world stress test for organizations, and it remains an unpredictable force in our society. Leaders and executives are making significant decisions without reliable information amidst a constantly shifting economic and regulatory landscape. Whether your company adjusted to a painful new reality, pivoted to new products and services or experienced a surge in demand, all organizations should take stock of their ongoing response and pinpoint what worked, what didn’t and what could be improved. Read on to learn why it is important to assess your organization’s fundamentals and how doing so may uncover opportunities for transformation through mergers and acquisition (M&A) activities.
Back to Basics: How, Why, What, Who
Entire industries have gone through monumental transformations as a result of COVID-19. Restaurants are focusing on contactless delivery, manufacturers are seizing control of their supply chain with vertical integration, service providers are succeeding with employees working remotely and airlines are in an incredibly difficult spot.
The million (trillion?) dollar question is whether the pandemic is just an unfortunate speed bump before things go back to “normal” or an indication of permanent, long-term change. Either way, now is the time to evaluate your organization’s operations and sources of profit. Are you still manufacturing the same product, using the same method, serving the same end user and delivering through the same geographic channel? Are you ready to pivot to a new strategy or enter into an adjacent industry? Business leaders not considering these questions in real time may find themselves on the outside looking in as the rest of the world innovates without them.
M&A as a Solution
Depending on the answers to the above questions, now may be the right time to think about M&A opportunities, which include acquisitions, divestitures and all-out sales. Let’s explore why this is relevant in the midst of COVID-19.
Acquisition: Given your organization’s current circumstances, a strategic acquisition might be more efficient than trying to accomplish a similar objective organically. Maybe your primary customer base is concentrated in an industry that became highly volatile due to the pandemic. Entering into an adjacent industry may allow you to leverage your existing business processes while mitigating risk through a diversified spectrum of end-users. Maybe it has become clear that your workforce lacks the technical know-how to compete in a digitally transforming world. Is there a competitor, customer or vendor to integrate and boost your organization’s intellectual capital?
Acquisitions should never be viewed as a magic bullet. Integrating operations and culture can derail even the most aligned organizations; however, with proper diligence and planning, acquisitions can be great tool for business acceleration.
Divestiture: This term often implies getting rid of something bad, but that is not always the case. Certainly, if a business unit is underperforming and dragging down profitability, it might be time to spin that off. The more challenging question might be: what if a business unit is profitable but doesn’t fit long-term strategic plans? What if it doesn’t align with the direction of the market? This could become apparent if a particular business segment requires a disproportionate share of employee time and management headaches. It may also become apparent if customer preferences are trending in a new direction that render a product or service outdated. Whatever the reason, think long and hard about the various segments of your organization and whether it might be time to consider a divestiture so that you can focus on more valuable endeavors.
Sale: Selling your business is clearly the most drastic option. Yet, in tandem with the largest generational wealth transfer expected through the baby boomer generation, the pandemic may be the final tipping point for owners looking to make an exit. For businesses significantly impacted by COVID-19, owners must do some soul searching to decide whether they have the energy to keep driving their business forward. There is no right or wrong answer and there will be pros and cons to consider, including how a sale of your business may coincide with personal financial objectives and estate planning opportunities.
The current climate brings increased scrutiny to all business sales and defies a one-size-fits-all approach to evaluating transactions. Buyers will want to understand COVID-19’s current and ongoing impact on the business. If profitability has suffered, transaction values may be tempered to account for the unknown post-pandemic market. This is not to say buyers should automatically expect a bargain; instead, thorough analysis will be key to understanding historical results and the magnitude of COVID’s impact on the company and industry.
RKL’s Transaction Advisory Services team helps owners evaluate M&A opportunities like these within their unique financial circumstances and economic conditions. Reach out to your RKL advisor or use the form below to start the conversation. Stay tuned to our blog for upcoming installments of our Response and Recovery in Focus series and visit our Business Recovery Resource Center for more insights and guidance.