COVID-19’s Impact on M&A Valuations

The M&A market is alive and well, though operating slower and more cautiously than it was three months ago. Unless your company sell groceries, medicine, or PPE, your business is probably off from pre-COVID-19 levels.  Everybody is being hit, and everyone’s in it together. Buyers are well aware of this, and are adjusting their thinking based on it.

These days, buyers’ views on business attractiveness and valuation depend on the industry being considered. The five categories of consideration are as follows:  

Category 1:

Companies that are down with a long road back. Think of suppliers to the restaurant, commercial aircraft, and hospitality industries. These businesses are being penalized in their valuations, with most being reduced by 20-30% or more in some cases. 

Category 2:

Companies whose business dropped during the lock down, however, will ultimately return to normal, but not for 6-12 months. Industries such as construction supplies, automotive, and capital goods.  Buyers are looking at these companies and adjusting valuations somewhat (5-15%) to account for the time before full recovery. 

Category 3:

Companies that were temporarily hit by the lock down but should rapidly return to normal. Industries like orthopedic supplies, plastics and packaging, and home furnishings. The valuations on these businesses are holding steady, though these deals have been delayed somewhat until lock downs have been lifted. 

Category 4:

Companies whose business is unaffected by the lock down. Industries such as water treatment, alternative energy, and recreational products. These companies are seeing an increase in valuations (5-10%) as they appear stronger and safer than ever in the sea of turmoil.

Category 5:

Companies whose business is being helped by the COVID-19 situation. Industries like PPE, remote working, and streaming entertainment.  Obviously, these companies are seeing skyrocketing values.

At TKO Miller, we are seeing very strong demand for most companies we are in the market with.  Some are choosing to wait until the dust settles, which makes good sense as they are in Category 2, but their future should be bright once the lock downs are lifted. Others who are in Categories 3 and 4 are moving full speed ahead; we just got 22 offers on one of those last Friday! Unfortunately (for us), we don’t have any in Category 5 at the moment!

So, we are telling people to keep the faith and stay the course, as the M&A world is still robust. Most company’s business models and market positions are just as solid now as they were 90 days ago, and buyers will look at it that way once the dust settles. COVID-19 will end up being a one-time adjustment to most company financials. We know that this doesn’t help fight the fight every day to keep the doors open or keep people working, but it should hopefully allow business owners to see that the struggle will be well worth it in the not-too-distant future.