How to handle an M&A after the pandemic

The easing of lockdown is expected to spark a bumper period for M&A activity. But what should you do if your business is involved in a sale and how should you prepare?

How to handle an M&A after the pandemic

The easing of lockdown is expected to spark a bumper period for M&A activity. But what should you do if your business is involved in a sale and how should you prepare?

The pandemic saw the number of mergers and acquisitions fall considerably, with one quarter seeing the joint lowest level of takeovers since 1975. Covid-19 has undoubtedly devastated many businesses, but there were many reasons why M&A activity was slower in 2020, including the difficulties of carrying out due diligence remotely and the uncertainty over the value of businesses impacted by the worst health crisis in living memory.

However, with lockdown slowly easing, many commentators believe the green shoots of spring will also be apparent in the M&A market, with a boom of mergers and takeovers predicted. Indeed, many businesses may find themselves left with no other viable option for survival but to find a buyer or seek consolidation through a merger following the past year. But what should you do if you are considering a sale and how can you prepare to get the maximum value for your business in the age of Covid?

Look forward as well as backwards

Traditionally the value of a business is often based on a multiple of profit made over the past few years, but the impact of the pandemic is likely to change this traditional method. For any prospective buyer or investor it is difficult to assess the true value of a business based on the past two years, as many have been so badly impacted by Covid. As a result, I believe we will see more deals structured on an earn-out basis, with deal values referenced to future earnings or future performance.  If you are to remain actively involved in the business following the sale then you should have some influence over the future performance to maximise this value, however less so if you are exiting the business completely; these dynamics will all be important in determining the agreed valuation structure.

I have always advised SMEs looking to sell to have all their paperwork in order from an early stage so that when opening up your books to prospective buyers or investors you can impress them with the professional nature of your business and increase your chance of maximising the value of your sale. In the post-Covid climate, it is equally important to document your future business plans and financial forecasts since much of the value you derive from your business may well flow from these rather than necessarily from recent performance.

Know your business

It is advisable for you to engage a legal professional early on in the process so that they can provide you with a due diligence checklist of items they would expect a prospective buyer to request. This will ensure that your lawyer can pre-empt any potential gaps or problems. I would always urge businesses to do this before they open up their books to a buyer or investor.

Business owners should also obtain their own valuation of their business. If you are approached to sell your business and are given a price, don’t just take that at face value, get your own valuation carried out as a benchmark. When you sell your house, you would get an estate agent to value it before putting it on the market and it’s the same with a business. 

The importance of contracts post-Covid

It has long been a common feature that business owners do not always keep their paperwork and contracts up to date as they are understandably focussed on the day-to-day. It has always been important that this is carried out before selling a business, but the pandemic has made this even more so. Any cautious prospective buyer will be interested to review your contracts to see if they are robust enough to withstand another wave or event as cataclysmic as coronavirus. They will consider the extent to which your business might be exposed to supply chain disruption and the extent to which your contracts may be capable of being terminated or varied if another drastic situation arises.

In addition, buyers will be looking at how the business has been affected by any loans taken out to keep it going during the crisis. How does that impact the business cash flow going forward in terms of debt repayments? 

Have you got appropriate business interruption insurance? You would not necessarily have found many buyers so concerned about this a couple of years ago, but a more cautious approach is now likely to be taken.

Legal housekeeping

When a business owner looks to sell shares in a company the buyer will expect to view the register of members to verify who the current shareholders are. It is noteworthy just how many companies never put together a share register as they have never needed to provide it to anyone. It’s important that you have this in place, including details of all historic share transfers. 

You should also ensure that all necessary registrations are in place; these may include registrations to help enhance or protect the value of the business such as intellectual property rights, like a brand name or design. Other registrations may be required by law, for example data protection, depending upon the nature of the business.  As with contracts, it is also important to ensure that all relevant registrations are in the name of the company, rather than, as is often the case, in the name of one of the directors.

Make sure you are ready

It has always been important to have your house in order when selling your business or seeking investment, but perhaps even more so after the last year. Whilst the green shoots of recovery all point towards a brighter future where M&A will once again flourish, you will only properly benefit if you bear in mind the lessons of the pandemic and demonstrate through good housekeeping that your business will survive long into the future.

James Lyons
James Lyons

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