Buying and selling in a pandemic

The booming market for mergers and acquisitions in the green industry has been slowed down by COVID-19, but it hasn’t been shutdown. Will it get any worse? And what will the market look like when the country’s economy recovers?

We reached out to five M&A professionals in the green industry to answer those questions and more. The information in this article is taken from interviews conducted around March 31 and follow-up interviews conducted between April 20-22. The original story can be read by visiting bit.ly/mergercovid.

Q: How is COVID-19 affecting mergers and acquisitions activity?

Greg Clendenin: Across virtually all industries, M&A activity has slowed down, especially in terms of new transactions coming in. With the green industry being labeled as an essential service (and it is), it has not been affected as much as others. However, that is not to say that it isn't significant.

Brian Corbett: While activity is still lighter, with more daily talk of being past peak outbreak in many key areas and the opening of the economy, it seems all walks of life, including buyers, are more willing to engage in conversations. Specific to the green industry, we have spoken with all the main buyers and they are all committed to their businesses and long-term growth objectives. We are advancing several transactions forward and while we do not expect the pace of the process to mimic pre-COVID timelines with continued limited travel, etc., we do see things moving forward.

Ron Edmonds: During the first three weeks of March, we mostly saw buyers (along with most everyone else) looking internally and, after ensuring the safety of their own teams, re-evaluating what the impact of COVID-19 on their access to capital, investment strategies and processes. We continue to have many investor inquiries. While dealing with bankers is a challenge right now, since many are overwhelmed by the stimulus programs and also troubled loans, some incentives apply to businesses doing deals now – like the provisions that have the SBA making six months of payments for borrowers apply to new borrowers through September 27, 2020, in addition to existing SBA loan borrowers. That is potentially very meaningful.

Jeff Harkness: We have seen a slowing approach from buyers on funding deals only during the late March and April COVID-19 pandemic. Most of our clients and strategic buying groups have operated and performed remarkably well during the last 30 days. Essential status, paycheck protection funds and great leadership has driven solid performance despite some short-term uncertainty. In the meantime, our remote meetings, packaging and conversations continue as most groups believe there will be some impact on performance in Q2 but they’re still excited about acquiring our top companies.

Tom Fochtman: M&A has not ground to a halt but pretty close. We need positive movement with the COVID-19 situation in order to get our economies going again and that includes buyers purchasing landscape companies again. Ceibass has told most if its clients to hunker down, focus on best practices, keep your team intact, make money so that they produce a highly profitable 2020. For the companies that we either have to market or were close to taking to market, don’t plan on it happening in 2020. It may, but don’t need for it to happen this year. It’s more important to produce a good year that they will be rewarded for, most likely in 2021. All of this assumes landscape remains essential in most states and that landscape companies are able to produce solid revenue.

Q: How has this affected any deals you had in progress?

GC: It has not affected transactions that we have in process either in the valuation or in the process continuing. Some deals in terms of the process may be affected when the process gets to a point when travel is desired by the buyer, but I see some deals closing without any travel. That can be done without any real negative impact on the deal related to travel restrictions. Technologically, we live in a small world. The transactions more at risk are the larger ones where the buyer may want to be on-site before the closing and that is understandable on the large deals. Some buyers will be willing to complete due diligence via email and video and audio conferencing and then close without being physically together with the seller.

BC: We pulled one specific transaction but are working behind the scenes to ensure we are at the front of the line when things have truly opened back up. We ran a small but highly competitive process so while we will certainly revisit conversations with the group we’d locked up with, there are other interested parties for them and for any good company. We are moving several transactions forward and are finding that for the right companies in the right markets, there is still a great amount of interest.

RE: We believe the deals that we have in process are likely to get done, but they are getting slowed down. Things are continuing to move forward and picking up a bit as companies move beyond initial shocks and the economy prepares to restart. I also have clients actively working in business plans to start new businesses.

JH: We have actually seen an increase in interest from groups looking to enter the industry. A couple current deals have pushed closings back 60 days, and there has been increased diligence regarding customer segments and short-term forecasting. Still, we have not had buyers leaving opportunities, nor experienced a slow-down in communication.

TF: My most recent example is currently moving forward. We are under a Letter of Intent and in due diligence. I’m speaking to potential buyers about our clients, but the market won’t really pick up a lot until people can travel. Interestingly we are going to see a shift with a lot of what was normal face to face go virtual. I think we could get to a point where a transaction can be consummated without buyer and seller meeting prior to closing. Not sure when that occurs but sooner than later. The M&A landscape is adapting just like other businesses are or will learn to in times of a pandemic.

Q: Do you think this will slow down the M&A long-term?

GC: Short-term, there could be a drop in the multiples of revenue and EBITDA that we have become used to in recent years. New accounts coming onboard are slowing and that will hinder the growth and profit of companies and those things obviously have an impact on valuations. But, as I said, that is short term. This industry is driven by need. Landscapes will continue to need maintenance. It will be back as strong as ever and M&A activity will come back as well. Now, having said all that, some companies are still experiencing significant growth and profit increase. I have two clients that are having exceptional performance year-to-date. One was up 49% in the first quarter over same quarter last year and the other was up 52% in March, and April is also going very well for both companies.

BC: The good news is that all of our clients have been deemed essential and are working. Now the key is to see how well they hold up financially. Assuming their financial performance is up, flat or close to, it will be a great selling point that the industry and the services provided are in fact essential to the economy and thus can withstand recessions and worldwide events like COVID-19 better than others. If this holds true, we’ll have a strong case that while there might be a very short-term discount in the midst of unprecedented economic disruption, that the best-in-class companies that we represent still have tremendous value.

RE: I think things will be slower for all of 2020, but there will be many signs of life. Some historic buyers will continue to be overly cautious, but others are pushing forward. The bubble has not burst – at least not yet.

JH: There is still a tremendous amount of dry powder (capital) that needs to be deployed. We will continue to have a very favorable low interest rate environment and access to financing both from commercial lenders and alternative financing sources (i.e. – private credit/debt funds and certain underlying dynamics which have been driving M&A in the industry to this point will continue. Market chaos breeds opportunity. The recent reduction of interest rates to near zero will help fuel deal activity, especially on larger transactions with market leading companies once the impact from the coronavirus begins to wane.

TF: I do not. The landscape fundamentals are still very strong, especially the reoccurring revenue nature of landscape maintenance and in particular, commercial maintenance. This rather sudden and unintended recession, by most economists’ accounts, is not projected to be that long – maybe up to 18 months. Unless COVID-19 rages and can’t be controlled, and unless it does not work itself out as predicted, I think the M&A markets in general will return to normalcy and be very active. This might even create a little bit of a frenzy once buyers can travel and get transactions in their pipeline.

Financial buyers do not like being idle. They have committed money that needs to be invested.

Q: What advice do you have for companies who were looking to buy or sell?

GC: If it is time for you to sell, then don’t stop the process. It doesn’t mean you’re going to sell now or when valuations are temporarily down, but the acquisition process takes some time. Go ahead and get those things done that you will need to do, with the advice of your advisor, so when it is time for you to close and close on the price and terms you like, then you will be ready to complete the process without starting from the beginning. During this temporary challenging period, press on.

BC: Hopefully by now everyone has figured out how to operate safely within the guidelines that have been put forth and communicated to their teams and their clients exactly what they are doing. Now, we need the focus on isolating the effects of COVID-19 in terms of financial performance. It will be critical to demonstrate where your company was before the outbreak and widespread closure of the economy, what you did in cost-cutting and other moves to protect your client retention, revenues, earnings, etc.

Only companies with good data, systems and tracking will be able to do this in specific terms. We feel this will be very important rather than taking the easy way out and assuming buyers will just understand that it was COVID and thus not ideal circumstances.

RE: There is always demand for good businesses, but it is even more important than ever to make sure you are ready to go through the scrutiny that will come with a business sale process. This is a great time for business owners to do some self-evaluation and identify those areas they can work on to make sure that buyers will consider their business very desirable. One of the things that I discovered years ago, especially during the Great Recession, is that there are always more buyers than sellers. That doesn’t mean it may not get harder to get deals done or that valuations may not fluctuate, but there are buyers. Take advantage of opportunities to pick up talent that might come from market disruption.

JH: Seek professional advice so you can have all the facts in an emotional time. Valuation, deal structure, balance sheet impact, taxes and net cash to sellers can be measured – so can forecasting future opportunity costs, EBITDA and value. We know all the players. Get educated, then develop a clear plan for next 1-3 years including some contingencies. While there is some uncertainty ahead such as pending elections, potentially higher taxes, labor challenges and some slowing in the economy, there still is significant opportunity. Don’t guess. Get a plan.

TF: It may not happen for them in 2020. Those companies should stay the course, focus on building and growing a profitable enterprise and stay focused. If need be, use whatever governmental stimulus is available and work their plan. If they were trending positively, they need to show another year of progress and good profitability and progress on any new initiatives that they might have undertaken.