By Jeff Swiggett, CBI, M&AMI
For those of us in the M&A business, the million dollar question we are all asking ourselves is when will the transaction market return to 2019’s high levels. A number of industry sponsored surveys show that transaction volumes falling between 30% and 40% in the second quarter. Early indications are that this will also be the case for the third quarter. Our business has experienced a similar decline. Given this, any prognostications as to when we’ll return to pre-pandemic levels is of intense interest to all, including the firms we represent. It is difficult to hazard a guess but reviewing the current conditions on the ground does give some indication as to where things are headed. Here is what we see:
- General Economy: Most owners I speak with are beginning to see some return to normalcy from the depressed levels this spring. But they are universally expressing caution because revenues haven’t returned to 2019 levels and the future course of the pandemic is still not clear. A few are actually doing quite well primarily because of the industries they are in, but this is balanced by a few that are still in desperate shape. For most, things are definitely better.
- Effect of PPP: Every owner we are representing, or have spoken to has received a PPP (Payment Protection Program) loan. I think it actually helped sustain them which gave a boost to business confidence and probably sustained the economy as well.
- Uncertainty: The twin specter of the pandemic and the election are still creating a lot of uncertainty among business owners and I don’t believe much expansion or investment will happen until these resolve.
So while conditions on the ground are improving, much still needs to be addressed. I actually attended a virtual presentation by a group of risk assessment managers of local, regional, and national banks that was sponsored by the CT Turnaround Management Association (CTTMA). It was interesting to hear the panelists perspective on lending risks going forward. They thought lending risks were still heightened primarily for two reasons. The first is that despite all the happy talk about a vaccine, it is not clear that it will be the cure all for COVID-19 and therefore we may be in for a longer haul dealing with the pandemic than is expected now. The second reason is that the support provided by the PPP program may be masking underlying weaknesses of some businesses making it more difficult to assess lending risk. Interestingly, election risk was not a big part of their concern. In general, my sense is banks will remain risk averse for many months to come.
What does this all mean for the transaction market? Things will return to normal slowly and as much as I’d like to tell you when, it is still unclear. Having too many unknowns always induces hesitation among both buyers and sellers which delays the number of deals coming to market and closing ones that are on the market. The best we can hope for is gradual improvement (which we are getting now) with some return to normal in late 2021 or 2022.