By all accounts, 2020 was a challenging year and M&A activity was certainly no exception. In the immediate aftermath of the pandemic and its related lockdowns, many M&A deals were thrown into turmoil. As the year progressed, and pandemic-related business adjustments became routine, M&A activity started to “normalize.”
While no one knows for sure how 2021 will look from an M&A perspective, business owners who want or need to transition ownership will likely find a willing market despite the ongoing pandemic. In fact, optimism is the byword for some.
There is capital available for deals in 2021, in part because of the deals that were terminated or put on hold during 2020. Some of that pent-up demand is looking for value, which includes exploring the purchase of companies that did not fare well during 2020. On the flip side, some buyers are willing to pay premium valuations for companies that withstood or thrived during the worst of COVID-19. Finally, vaccines are rolling out, so the end of the pandemic appears to be in sight.
Despite this optimism, uncertainty adds complications for M&A transactions. One obvious complication that will continue in 2021 are Paycheck Protection Program (PPP) loans.
PPP loans were a sticking point in 2020 because of a lack of guidance surrounding how these loans would be handled from a forgiveness and tax perspective. In October 2020, however, the Small Business Administration issued a procedural notice that went a long way toward assuaging buyer concerns. In fact, one still-pending transaction I am working on evolved from an adamant buyer insisting on full resolution of a PPP loan to more willingness to simply accommodate the PPP loan through the procedures outlined in the SBA notice.
Some businesses may even qualify for a second round of PPP loans in 2021 and they may be wondering what to do. For those business owners, the deciding factor should be the importance of the loan to the ongoing success of the business. Maximizing the future viability of the business is foremost because M&A transactions can fall through; and the existence of PPP loans, while adding a layer of complexity, do not create an insurmountable obstacle to closing a deal.
Clearly, ownership transitions for both buyers and sellers during 2021 will likely include additional tensions, but new strategies and more creativity applied to due diligence and deal structuring will likely prevail in most cases.
Jeff is a partner and chair of Tonkon Torp’s Mergers & Acquisitions Practice Group. He focuses his practice on mergers and acquisitions, corporate finance, securities regulation, and corporate governance.