A couple of small business deals Andrew Longcore has been approached about lately illustrate the effects on the M&A market this year from the COVID-19 pandemic.
The parties wanted to do a “try it before you buy it type of deal,” where the prospective buyer would run the business for an interim period under a management services agreement with the seller. The two would then execute the sale of the business at a later predetermined date, after they have better clarity on the pandemic’s path and its effect on the economy and business.
The structure would allow a buyer to “get in and get a feel for how the business runs, see what the impact is and help with the recovery, then at a point in the future they can actually acquire the business,” said Longcore, an attorney at The Business Law Group in Grand Rapids that specializes in small business M&A.
The structure reflects some hesitancy in the M&A market at midyear resulting from the pandemic and economic recession, Longcore said.
“With the discussion on the potential fall spike, or the fall shutdown or partial shutdown, there are a lot of people who are hesitant. ‘If I do a deal now, I don’t want to take over the business and then have the economy go right into a shutdown again.’ That would be a problem,” he said.
Overall, Longcore and other M&A professionals say deals are still getting done these days, although volume is down from a year ago and there are clear effects from the pandemic in how deals get gone.
For instance, buyers and the lenders who finance deals are asking more questions and doing deeper due diligence. Seller financing, earnouts and delayed closings — where they agree on a deal, but put off the closing for a set period — now get used more often to structure a deal.
The net of it is that a deal may take longer to put together and close, according to M&A professionals.
On the seller side, M&A professionals say they’ve seen some reluctance to sell. Some prospective sellers are deciding whether to go to market right now or have opted to wait as the COVID-19 pandemic and its economic effects play out.
“I still have a lot of potential buyers that are excited about buying now, but there are just more complications thrown into the mix now than in normal times because of the uncertainty about how the past is going to affect the business and what’s coming in the future,” said Jon Siebers, an M&A attorney at Grand Rapids-based Rhoades McKee PC. “Are we going to get a second wave? Are we going to go back to more restrictions? Nobody knows.”
Max Friar, managing partner at Calder Capital LLC and Small Business Deal Advisors LLC in Grand Rapids, said he’s also heard from sellers who are worried about getting low-balled by buyers and opted not to put their businesses on the market.
“They think they’re going to get low-balled, and you don’t really get excited about selling something when you think you’re going to get low-balled,” Friar said. “You have a lot of them who are going to grit their teeth and say, ‘I’m not going to take a discount. I’ll hunker down and get this thing back to where it was before I take a discount on my sale price.’”
A “vast majority” of buyers will pay a fair price for a business, although there are always some in the market “looking for a discount,” he said.
In looking at the state of the market for small business M&A, Friar said he’s been “pleasantly surprised” during the pandemic that most deals he had under contract or letter of intent moved toward a close or have continued to proceed. When the pandemic hit, Friar was “a bit pessimistic” about the effects on the small business M&A market.
However, Friar had a couple of deals “just totally fall apart.” One was a buyer who had a company under a letter of intent and “just said, ‘Look, I’m out because I have to focus on my other business holdings here.’” He also had a seller who told him, “I want to go off the market … batten down the hatches and completely focus on our business right now.”
‘Certainly had an effect’
As midyear approached, Calder Capital and Small Business Deal Advisors had closed 19 deals since Jan. 1, Friar said. That’s up from the same point last year, although “that might be a bit of an anomaly” from what others in the market are seeing, said Friar, who recently sold a business, Corridor Coffee on the west side of Grand Rapids, that he owned for two years with a business partner, Melissa Somero.
Katie Sargent and Alyx Schroeder closed June 14 on the acquisition of Corridor Coffee. They started talking to Friar and Somero in February, just before the pandemic hit, and had an agreement in place. They then decided to “still talk about it and consider it as an opportunity, but see where COVID would kind of take things business-wise,” Sargent said.
After waiting and seeing how well the business was able to reopen for takeout and delivery, and that it remained profitable, the buyers decided to proceed after “coming up with a plan on how we would address COVID,” Sargent said.
“It certainly had an effect, but (the business) was still doing pretty well. We just felt optimistic about it and still decided to go for it with all things considered,” said Sargent, a 24-year-old recent graduate from Davenport University with a business degree.
“It was a little scary right at first, but we gave it some good thought, looked at the numbers, and all things considered, we decided it was still a good opportunity to pursue. I think we would have regretted it if we had let COVID scare us away,” she said. “We thought it would make a good fit, so we’re giving it a go.”
Coffee “was not necessarily my thing” when Sargent saw Corridor Coffee listed for sale on BizBuySell.com, an online marketplace for small businesses. She showed the listing to Schroeder, who had always wanted to open a coffee shop, Sargent said.
“It just went from there,” said Sargent, who handles the “business side of things” while Schroeder “can do all of the fun barista side of things.”
The two are among buyers who are proceeding on deals even during the pandemic, Friar said. He’s seen sellers “pull back pretty hard and buyers come out pretty forcefully.”
“Right now, you kind of have a herd of buyers out there looking to buy, and you don’t have a herd of sellers,” Friar said.
‘See the light’
Going into 2020 after having its best year ever last year, Spring Lake-based M&A firm InVictus LLC “looked like we were going to knock ’19 out of the park,” Managing Partner Mike Teeter said. Then the pandemic hit and business slowed.
In June, InVictus started to see business return and “we’ve really started to push again” as buyers and sellers got more active and “we’re starting to see people get ramped up again,” Teeter said.
“Right now, we see the light at the end of the tunnel. We’re starting to see movement and we’re coming off a period of time where everybody just shut down,” he said. “We’re starting to see people feeling more confident in being able to do something now.”
Buyers right now are “aggressive” in searching for deals, said Teeter, who as well has seen sellers holding back.
Concerns persist about the pandemic’s potential second wave hitting Michigan, as well as uncertainty that comes with a presidential election year.
“If this thing has a tail, it’s all going to change everything. If they find a vaccine for this thing, we’re having a different conversation, too,” Teeter said. “There are so many variables out there right now that can cause a lot of speculation and a lot of hesitancy, but I’m hoping that we’re still going to see the deal flow and some pent-up demand taking place. The money that is on the sideline is still going to get deployed.”
At Rua Associates LLC, President Randy Rua also reports that buyer interest has picked up. That higher interest runs up against a relative lack of businesses for sale, as some prospective sellers hold back, Rua said.
Rua described a plastics molder in Illinois he represents that wants to add immediate capacity in the U.S. and move work back from China that has been outsourced. The company told him it has “scoured all over the Midwest” and still had difficulty finding a prospect, Rua said.
“We’re seeing a lot of buying activity in manufacturing. We’re getting calls daily from companies wanting to buy other manufacturing businesses and saying they can’t find opportunities,” he said. “There’s demand, but there’s not inventory because sellers are sitting on the sidelines.”
Rua worries that “we’re going to be fighting this perception of sellers that they have to wait six months to a year” to sell, delaying deals well into 2021.
Based on prospects he represents who recently started considering coming to the market and selling their companies, their hesitancy stems from the uncertainty about the economy and the pandemic’s trajectory, their lower sales from the economic downturn that have not fully recovered, and worry they’re “going to get beat up in the marketplace,” Rua said.
“My sense is that’s not the case, given the demand that’s out there for acquisitions,” he said.
The Illinois company is willing to pay a price that would have been expected pre-COVID and “would not discount (for) what happened in the last several months at all,” Rua said.
Teeter said would-be buyers who believe they can drive a deal at a discount will find that many sellers will not bite and instead wait to sell.
“You’re not going to have sellers that are going to be eager to sell at a discount because of something that happened that was out of everybody’s control,” Teeter said. “They’re not going to sell at a discount just because their numbers are down, nor are they expecting that if they thrived during this period that they’re going to get the uptick on it, either.”