Rosset: Big Changes in Mergers and Acquisitions

On March 12th of this year I published an article discussing what was happening in mergers and acquisitions right as the virus took a devastating bite out of our industry’s revenues. Let’s look at some of the main issues that article dealt with and what has changed since then.

I suggested that, at the least, the next few quarters would be extremely disruptive not only to the economy in general, but particularly to service industries like ours. Especially hurtful to large office-based companies like call centers, financial, legal, insurance and health professional office buildings and clients who use office coffee services.

In speaking with operators, the hardest hit segment of our industry has been OCS. Based on financial reports and predictions from CFOs of these types of clients, many don’t see a majority of their employees working in the office anytime soon. Some have suggested they are revamping their operations to have employees who can work from home do that permanently.

Other companies and institutions most affected by this health emergency have been higher education/universities, hospitals, retail, hospitality and heavy manufacturing. As of this writing, most of these categories are still somewhat in the dark about when and to what degree they will be back to “normal” schedules and capacities.

Buyers had stopped buying

As of that March article, virtually all the traditionally major buyers of convenience services operators had put the brakes on purchasing. Which made sense, as nobody knew how much more business would be lost or when things might turn around again after that date.

Everyone hoped that this would be a short-term problem that would be rectified with government intervention and the discovery of an effective vaccine. Of course, we now know that there is no magic pill or specific guidelines that will guarantee to stem the virus at this point.

The U.S., of course, is a democracy where people generally have freedom of choice when it comes to how they want to conduct their behavior. Although most health experts advise the population to wear masks and social distance, the fact that large groups still ignore those mandates probably means this emergency will be with us for a very long time to come.

Does that mean we can’t expect buyers to be interested in acquisitions again? Thankfully, that is not the case.

What potential sellers should do now

In that previous article, I, like others in the M&A field, were suggesting that sellers should go slow and not give up easily. After speaking with dozens of operators, most indicated a loss of between 25% to 85% of their revenues. At that time, I had suggested that, at best, it would be difficult to put a value on an operation with all the chaos. We couldn’t base a purchase price on 2019 numbers and until more time passed; there was no way to determine how much business would be recovered and how quickly.

So, at that point I felt it best for operators to downsize, cut major expenses where they could and hang on until things improved. That was great advice then and still is for many of you, but for others, it may be time to reconsider a sale.

A major change over the past few weeks

At the beginning of August, I started receiving calls from some of my major traditional buyers. A few others I reached out to. For the most part, their business had improved enough and they were now interested in acquiring again!

I’ve discussed — and had buyers agree to — a very well thought out model where a seller who is tired and can’t hang on will be able to sell their company now for a very fair price, although there would be a longer than normal holdback of purchase price to guarantee the sale going forward. In this way, the buyer is protected if the economy continues to nosedive, but the seller would also be able to reap additional payments after closing if their client’s business started to improve.

Many of you have been affected where clients of yours are still in business but are not letting you in to service those accounts. Therefore, a longer holdback period would allow for these accounts to come back online after the close and the seller being able to still receive a purchase price for many of those accounts.

So, in conclusion, there are now buyers willing to take a look again. Every buyer has agreed with me to do fair deals. No one has suggested they expect these deals to be fire sales. I wouldn’t suggest anyone consider selling if I felt they would be taken advantage of.

While I still feel the majority of potential sellers should try to hang on for better times, there are many others that are a bit more desperate and will may appreciate this opportunity to help get them out of a hole and move on to retirement or other endeavors.