Interest in mergers and acquisitions (M&A) staggered to a halt when the COVID-19 pandemic hit. Contractors became more focused on short-term survival than long-term strategic initiatives, and investors wanted to wait before making any moves. Now that businesses are starting to resume operations and markets have started to improve, M&A transactions have picked back up.
Contractors may think that this is not the most appropriate time to sell their business. After all, the future of construction projects is unstable due to the pandemic. Owners are canceling or delaying contracts causing turbulence in the market. Despite that, contractors may want to sell in 2020 because of the November election’s uncertainty and the possibility of higher taxes and more regulations in future years.
Contractors that are struggling may consider selling in the coming months. And truthfully, pursuing an M&A during a pandemic does not have to be a desperate, last-ditch effort. A few factors make the current setting an appealing time to sell part or all of a contractor’s business.
Deal Structures are More Fluid
M&A deals are being structured differently in the post-COVID-19 landscape—in a good way.
When the investor wants to take COVID-19 risks into account, and the business owner wants to get a fair price for their equity interest, there is likely to be a gap in valuation expectations. But there are some creative ways to bridge this gap. Earnouts, for instance, are becoming a standard component in today’s deal structures. Instead of a large upfront payment, the buyer can request future payments when they meet certain milestones. Another common technique is scheduling the buyout over years—selling 20% now and then the remainder in five to seven years. These techniques can provide the flexibility that contractors are looking for while eventually delivering the investor’s value.
Sellers’ Priorities Have Shifted
The priorities that business owners held before the pandemic may not be the same priorities they hold now. Instead of valuing control and independence, contractors may value business continuity and stability. M&A can provide the continuity and stability they are seeking.
Purchasers See More Opportunity
Buyers with long-term outlooks likely see the pandemic as a dip and a predictable wave of ups and downs in the market. Businesses will eventually resume normal operations, customers will want to build a project and the financial markets will ultimately recover. The ideal time for investors to make a purchase is when the market is low and business recovery prospects are high.
When purchasers see the acquisition as a long-term investment, they will likely place less weight on current year cash flows. Suppose the business can demonstrate an improvement in operating results and growth potential. In that case, the buyer is likely to value the business for its scalability or resilience more than its short-term revenues.
If business owners know that their operations will recover, they can still ask for a high valuation, and the deal can be structured to please both parties. But the true benefit of appealing to investors is having the freedom of choice. When more individuals and private equity firms are looking for investment opportunities, contractors can have their pick of who to bring on board and how much equity to relinquish to get them the outcome they desire.
Equity May be Easier to Obtain than Debt
Taking on debt may not be an option for contractors right now. Banks are more hesitant to extend credit; when they do, they will likely seek businesses with low debt-to-equity ratios. Unfortunately, contractors may already be highly leveraged after taking Paycheck Protection Program loans or Economic Injury Disaster Loans. Selling business interests—even just a partial interest—can bring in the capital needed to keep the business afloat. And if those business interests are non-controlling, the contractors can retain control of their company while accepting that capital infusion.
The current circumstances may still be challenging for many. Yet, even in less-than-ideal cases, businesses can emerge from an M&A transaction content with the hand they were dealt and with a positive outlook for their future.
