Alteris periodically reports on M&A valuation metrics in the middle market.
We are sometimes asked to expand on what’s behind the numbers.
Especially given all the uncertainty during the pandemic.
The last post was about Deal Structuring trends. This post is about Due Diligence.
In middle market M&A – as in all market segments – the time to close a deal time has been substantially extended.
Increased levels of due diligence is being conducted especially regarding items that could be impacted by COVID-19. Businesses are attempting to minimize the impact of the virus as it relates to operations and the selling process. Buyers try to adjust to the new normal Though no one knows exactly what that will be.
There is a much higher level of scrutiny over near-term financials. This means forecasts for 2021 and 2022 are analyzed particularly carefully. Lenders especially are insisting on extensive forecasts with demanding three-statement modeling.
Pretty much all in-person diligence meetings have been postponed or cancelled. The main exception is if there has been no meetings between the buyer and seller before.
We’ve seen the use of video conferencing for remote discussions, management presentations, site tours, and so on. Sometimes the seller will prepare and record a video for the buyer and its representatives to watch on their own time line.
The use of technology other than remote video has increased dramatically. Advanced visualization and analytics tools are being used more widely. This applies to both acquirers and sellers. They use these analytics and modeling techniques to quickly plan various scenarios. The technology is used to improve the accurate analytical insights needed during every phase of the deal. We believe this is a trend that will exist long after the pandemic has ended.
Probably due to COVID-19, we are noticing the heavier utilization of industry consultants and outside analysts. We believe this trend will also continue.
Because of all the uncertainty surrounding the pandemic, buyers place quite a bit of focus on cash flow and working capital management. Many of the analyses conduct stress testing businesses under various scenarios. There is an emphasis on the stability of the business under varying conditions.
We fully expect that the pandemic environment will have changed the Due Diligence environment so that these will not be temporary trends but a permanent part of the M&A process going forward.
