The following article is a result of feedback I have received from current clients and friends in the industry, many of whom are also potential sellers and buyers I have worked with recently. Most have lost between 40 and 90% of last year’s first quarter earnings. Some of the opinions expressed here are mine only, while others result from a compilation of opinions expressed to me by your peers.
I previously wrote about what I saw as the effects on our industry from this worldwide emergency at that time. Everything I predicted has happened and some of the future conditions I suggested will happen, like certain employers and institutions potentially not operating in the same way as before COVID-19.
Clients such as call centers, large white-collar companies (financial institutions, legal firms and insurance companies) and colleges and universities, both public and private, are currently changing and may continue to change the way employees, students and customers will interact with these accounts.
For many, the virtual workplace, work from home and virtual classrooms will be the new normal, making it difficult for you to continue drawing in large revenues from these accounts. Other companies, such as large manufacturers and fulfilment centers, will continue to go robotic and use artificial intelligence, drastically scaling down the number of onsite employees you will be servicing.
Effects on mergers and acquisitions
When I wrote my previous article, I still had two very easy deals about to close. One is a company that does only micro markets and office coffee service (OCS) accounts, so it was a very attractive and simple fold-in acquisition. We had a term sheet offer at 80%(!) of sales. Just before the close, the purchaser — who was in the midst of losing 65% of their revenues by April 1st — could no longer close on the deal, for obvious reasons.
The other transaction is a company I have been advising for the past few years on how to position themselves for the highest price. He has vending and OCS only (no markets) but had all the technology, revision doors on all older equipment and no accounts under $6,000 annually. I had a commitment for 62% of sales. Obviously, that will have to wait.
The reasons I don’t see easy, cash-only acquisitions coming back anytime soon is the fact that the buyers are not in any position to purchase right now. Others have suggested that their acquisitions — although currently put on hold — will be completed someday at the same price and terms as was negotiated previously. That’s impossible.
First, we don’t know when those same buyers will be back in the market for acquisitions. Second, how can anyone assume those deals will be at the original price and terms when so much business has been lost? And no one can predict how much of this business will be retained three to 12 months from now.
Most of you who know me understand that I only deal with the six largest acquirers in our industry, besides a handful of large Canteen franchises. I don’t deal with parties from outside of the industry as these non-industry buyers expressed that they wanted to do large EBITDA operations and then roll other companies into their first purchase. How are they supposed to compete with the Canteens, AVI Foodsystems and other formidable industry acquirers who experience huge upsides on these deals and are able pay purchase prices much higher than a purely debt/equity investor?
As far as rolling more companies in their initial deals, these out of industry buyers don’t realize that in numerous markets in the U.S., there are few — if any — decent fold-ins left. States such as Arkansas, South Carolina, Indiana, Illinois (outside of Chicago), most mountain states, Nebraska, Kansas, a number of New England states and even numerous areas in Texas have just a smattering of good potential sellers left. That means that if the outside investors make the wrong deal in the wrong demographic, they won’t have any rollups to make their initial investment pay off.
Right now, virtually all deals are on hold until the majors can experience some semblance of normalized operations and figure out where they stand financially and operationally, long before they will start purchasing again.
This brings us to a discussion of what a potential seller does at this point. My answer is NOTHING in terms of selling. In fact, I will hesitate in taking a listing at this point. I won’t give an operator false hope as to what their company is currently worth and how soon we can close a deal.
I’ve always been ethical and outrageously honest with those who contact me for my help. I’m always available for free advice on what I feel your particular options are, and there are two ideas I’m working on that may help financially stressed owners who are at the verge of collapse. While you should always plan for the future — and there are specific ways I can suggest how to do that based on each individual’s situation — for now, I will generally suggest that you hang on and reorganize accordingly.
Hopefully you are able to wait out the crisis, and we can look at the numbers afterward. Don’t consider selling until you recover the majority of the business that you feel confident about keeping. Selling now will probably result in a lowball offer, which essentially would be giving your company away. Just like you shouldn’t sell when the stock market is at a low, you shouldn’t panic and try to sell off your company when you will get a very small percentage of what it will be worth sometime within the next year.
In the meantime, apply for all loans and grants currently available such as the Paycheck Protection Program, the Economic Disaster Injury Loan and any other IRS, federal and local government, SBA, and financial institution delays of credit card payments, tax payments, mortgage, fleet and any other loan payment adjustments you qualify for. Right now, you have to keep the doors open but conserve as much money as you can.
I understand that many of you are experiencing extreme anxiety and total frustration at this point. But remember that you have worked so hard for so long. You owe it to yourself to let the air clear and make these lifetime decisions only once the world and our economy has regained some solid footing.
Remember that his is first and foremost about your health and the health of your family, your employees and friends. Be patient. It’s going to take time, but I still believe there is light at the end of the tunnel.
MARC ROSSET is founder and president of Professional Vending Consultants Inc., a specialized intermediary for acquisitions of full-line vending, food service and office coffee service companies in the U.S. PVC has represented more than 310 transactions with gross sales value of just over $900 million since 1993. Rosset has played a key role in helping to establish industry-recognized guidelines for the value of operations in our industry. He can be reached at [email protected] or (312) 654-8910.