To Sell or Not To Sell: M&A Prospects in Late 2020 and Beyond

Partners from Tonkon Torp’s Business and Bankruptcy Departments hosted a webinar on October 15 to look at M&A prospects and strategies for late 2020 and beyond. The panel was moderated by Sherrill Corbett and featured Claire Brown, Tim Conway, and Drea Schmidt. Brian Murphy of Meridian Capital, an M&A advisory firm based in Seattle, co-hosted the event. A recording of the webinar is available below, and viewers are encouraged to follow up directly to ask questions not addressed during the program.

To kick off the panel, Brian Murphy shared his outlook for an extremely dynamic M&A capital market that has swung from a near halt at the onset of COVID-19 to today’s record pitch activity and deal flow. With a growing pressure to put $2.4 billion available private equity to work, investors are active but cautious with a narrowed focus on their core industries and themes. They are also pushing risk to the sellers to address ongoing concerns about COVID-19 items, which include PPP loans. On the seller side, Brian is seeing many private companies respond to continued uncertainty by looking at new options for liquidity, alternative financing, or complete exits. With the caveat that the election and the pandemic carry unknowns, Brian is optimistic that 2021 will be one of the strongest M&A years in history.

Acknowledging that M&A transactions are facing enhanced buyer due diligence, Claire Brown highlighted the categories being more closely scrutinized, including financials, strategic plans, debt management, contracts, and risk potential. Since enhanced diligence increases transaction timelines and costs, Claire recommends that sellers increase transaction efficiency by preparing ahead of time and responding quickly and thoroughly to buyer requests. Turning to trends in negotiation agreements, Claire shared how the potential for more risk sharing or risk shifting to support higher valuation could play out. Agreements may include larger escrow deposits, special indemnities to offload risks, sharing future growth through earn-outs, or keeping the seller involved through equity interest rollover.

Drea Schmidt explored the impact of PPP loans and forgiveness in the context of M&A, and how they increase the complexity of a transaction. She also stressed that many sellers have not anticipated the impact that obtaining required consent from the PPP lender and the SBA could make on the timing for a deal. She provided strategies on how to address the loan and the prospect of forgiveness during due diligence, options for addressing buyer concerns regarding risk, and how to treat the PPP in the purchase agreement.

Tim Conway gave insight into the benefits that a sale-based Chapter 11 could bring to sellers in distressed situations. Benefits include generating time to concentrate on preserving value, attracting new groups of buyers interested in distressed assets and the prospect of a free and clear title, and an increased sale price or bidding war through publicized auctions. He noted that timing for 363 sales can also be completed in much less time (roughly 60 days) and that bankruptcy courts are eager to help and support an efficient process.

M&A transactions in the near term will involve a higher degree of difficulty and cost more. To be able to take advantage of this window of increased investor activity, advance preparation is key.

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