How much will your company be worth after the coronavirus pandemic subsides? That’s the question advisers in the mergers and acquisitions industry considered Wednesday in a town hall presented by the Alliance for Mergers & Acquisitions Advisors.
Grocery retailers and their suppliers stand to fare better than restaurants and bars that were shuttered. But how well a business’ valuation weathers this epidemic also depends on how soon the owners might seek a private equity infusion or a buyer, experts said. Most hoped the economy would pick up in the third quarter.
“I’m not sure we’re going to get back for a while to the multiples we had. We have to figure out what is the new norm,” said Roger Schoenfeld, managing director at Cross Keys Capital, an investment bank. “We won’t know until the third or fourth quarter, except for food manufacturers.”
If companies can hold out, their valuations might be less impacted. But certain industries will be perceived to have more risk, and the risk could reduce the “multiple” used to compute its valuation, Schoenfeld said.
A small company’s cash flow or earnings before interest, taxes, depreciation and amortization (EBITDA) typically is multiplied by a number to determine its valuation, experts say. For companies under $10 million, the multiple might be three to five, while larger companies’ valuations might be six to eight times EBITDA in a more typical environment.
When a prolonged crisis hits, a lower multiple might be used, Schoenfeld said, reflecting the hesitation in the market to complete an acquisition.
In the food industry, the opposite effect could occur where grocers and food-manufacturers see their revenue and earnings drop off after restaurants re-open, enticing more consumers to eat their meals away from home.
“There’s a lot of uncertainty, and uncertainty is very difficult in the M&A world,” Schoenfeld said.
Lindsey Wendler, managing director of National Transaction Advisors, a Riverbend company, moderated the discussion April 23, asking the panelists how they communicated with their client companies and what the top concerns were. Most said they were communicating more often with owners, including taking calls evenings and weekends.
The panelists said the pandemic’s impact must be determined on a case by case basis. Jay Freund, managing director of Stratford-Cambridge Group, said the factors he considers most important are the steepness of “the cliff,” before a company runs out of funds, and the speed at which it can recover.
Businesses that have closed their doors and furloughed employees could feel the impact more than business-as-usual companies or those that have picked up sales, such as food companies and online merchants selling essentials.
Many firms in the private equity field itself have gone into an emergency mode, where staying connected with clients is more important than trying to get deals done, the experts said.
Stratford-Cambridge, a private equity firm specializing in industrial mid-market companies in the Midwest, is emphasizing the welfare of the employee base at its client companies, Freund said.
“With the hesitation that’s generally out there right now, we at Stratford-Cambridge put a bid in on Monday but we caveated it,” he said. “We need to convince ourselves it has some form of sustainable cash flow and that it’s viable.”
Some companies have begun slashing expenses and hoarding cash to bolster their net income, but it’s too soon to understand the longer trend given the uncertainty over how long the crisis will last.
“Underwriting is a challenge,” said Dan Harvey, senior vice president at Wintrust Commercial Banking.
The lower valuations are, the more opportunity some buyers might find in the market. But activity is being curtailed in part due to a tightness in bank loans. “Instead of trying to get maximum leverage on a deal, there might be a more conservative approach,” Harvey said.
“Banks have been focused on PPP and other programs,” Harvey said, referring to the government’s Payroll Protection Program that quickly ran out of the initial $349 billion in funding. The U.S. House is expected to approve $484 billion in appropriations for small businesses and hospitals soon, which the Senate approved Tuesday.
The PPP program will forgive the loan if 75% is used for payroll and the rest is used for rent, mortgage and utilities. But the employer must maintain workers at their salary levels or quickly rehire them for the loan to be forgiven. The 1% loan matures in two years for companies that lay off workers or cut wages.
But obtaining a PPP loan is a problem for companies that didn’t act fast because demand has exceeded supply. Citibank has stated on its website:
“We know the news that the Small Business Administration (SBA) has fully allocated the $349 in funding for the Paycheck Protection Program (PPP) is hard for many to hear. However, in the event that additional funding will be approved, we are diligently processing the applications that have already been submitted and accepting applications from our Small Business Banking clients….We will hold on to applications for processing for up to 30 days, in the event that additional funding does become available.”
Freund said Stratford-Capital has furloughed employees at the companies it invests in. “We have communicated we expect it to be temporary,” he said, noting employees are still receiving health care benefits. “If we can’t get them back, it could be an issue.”
Besides retaining employees to prevent the loss of talent imperative to a company’s valuation, the experts said keeping workers employed is important to the economy. According to a report this month from the St. Louis Federal Reserve Bank, https://www.stlouisfed.org/on-the-economy/2020/april/closing-restaurants-hotels-spills-total-employment the losses due to COVID-19 in the hotel and food service sectors will be about 30% higher than initially predicted because of the ripple effect on suppliers.
Those industries employ a large number of workers who when furloughed are expected to cut back on spending.
“Unfortunately, a lot of consumers live paycheck to paycheck, so getting consumers back to work is the most important indicator in my mind,” Schoenfeld said. “The economy is driven by consumer spending. People need to get back to work and get a paycheck. The less discretionary income they have, the less they spend.”
— Ann Meyer