Like so many industries and sectors of business, the beginning of 2020 held much promise for U.S. accounts receivable management companies. The M&A markets were attractive for buyers and sellers, but now in the middle of the pandemic, what does M&A in the first half of 2020 look like?
COVID-19’s Impact on M&A in Accounts Receivable Management
Sounding much like a broken record, the rate for closed M&A deals, compared to previous years, collapsed in the first half of 2020.
Analysts say that this reduction is directly linked to the Coronavirus (Covid-19) pandemic in the United States. Many companies eager to sell were forced to place those plans on hold, beginning in mid-March when adjustments were made throughout the country to find a way to endure the pandemic.
These companies’ financial performance was also in doubt with some clients and state governments shutting down all collection activities in specific regions, and for certain types of accounts, like student loans.
Like other sectors, the deal activity diminished significantly, as buyers were forced to reevaluate their budgets and forecasts to recognize the impact of the virus. Further, representations and warrantees provisions were examined carefully so buyers were not left responsible if sellers underperformed. Due diligence processes were also stifled and barely inched forward as travel came to a virtual stop.
Expectations for the Second Half of 2020
Analysts believe that there will not be a significant surge in the amount of M&A activity in the U.S. accounts receivable management industry this summer. That’s because many states are reporting significant increases in the number of COVID-19 cases in their regions. The fear of a second wave and the possible re-closing of the economy is a possibility. This is keeping some acquiring companies from getting settling with the fact that the terms of their transactions may now have to include an account for potential downturns. Beginning this fall, business buyers and sellers likely will both concentrate on the November elections because those results will impact M&A transactions.
A new set of business buyers is also materializing. They are communicating to owners and calling brokers to express their interest in acquiring underperforming companies at bargain prices. It’s true that some companies will be forced to sell during the pandemic, most companies will try to delay until the market stabilizes.
In addition, some buyers are modifying their acquisition criteria. They are changing their buying parameters to address the pandemic’s impact.
As recently as three months ago, some experienced buyers were targeting specific market segments for expansion. But they are now looking to purchase companies that will diversify their companies into new asset classes less affected by the coronavirus. For instance, some top performers in the federal government sector are exploring into new markets for growth as the U.S. Department of Education ceased collection activities until September.
There are also new “vulture” buyers emerging who are searching for distressed companies they could purchase with little or no cash. But there are other buyers who are worried about their own depleted resources during the coronavirus pandemic.
Most business executives are focused on their own business performance and can’t be troubled with considering any possible acquisitions in the near future. Some companies have ceased all business travel in March, and remote due diligence requires a degree of sophistication and experience that most companies simply do not have as a resource internally. The cost and availability of external resources is another restricting factor. With a company’s existing resources stretched quite thin in the COVID-19 pandemic, most due diligence processes are being extended by months to address such shortfalls.
The pricing gaps have widened between some sellers and buyers, experts say. How transactions are priced is always a concern among buyers and sellers in any market. But in today’s volatile market, some sellers are holding onto 2019 valuations, arguing that performance downtowns are only temporary and their revenues and profits will rebound. As a result, they feel they shouldn’t be penalized with a lower purchase price if they were to sell their company during the pandemic.
Most buyers of accounts receivable management companies will keep a weather eye on historical financial performance; however, they are apt to value the selling business based on current performance indicators. This creates the potential for a huge gap in pricing between the parties.
Some buyers are looking to bridge this difference in price with creative deal terms and longer term earnouts to share the risk with the seller. But most sellers still want cash-heavy transactions if they are to be willing to let go of their company.