The Covid-19 crisis has had a significant impact on the deals market here in the South West. With the lockdown, the introduction of social distancing measures and the uncertainty created by this ongoing situation, many of the deals that were progressing have been put on hold as businesses focus their efforts on immediate concerns.
For some businesses, which have been badly affected, selling is now the most sensible option. Others have become more profitable as a result of growth or diversification during the pandemic and now want to make the most of the new opportunities.
While the situation is different for every business, here are five key ways in which the deals market has changed:
1. It has forced some business owners to look at exit options
The crisis caused by the coronavirus pandemic has led many business owners to reflect and reassess. The result is that some are now forced to consider whether or not they have a sufficiently robust long term strategy to survive and the liquidity to trade on post lockdown. Some will inevitably decide to sell, despite low valuations, to avoid having to keep the business going through such tough times. Others, particularly those that can demonstrate their company’s resilience during the Covid-19 pandemic, will choose to wait for the market to recover and for their business to regain value.
2. Funding has changed
While some business owners may be keen to sell, the funding may not be there for buyers to step forward. The private equity market has slowed down, as they concentrate on their existing portfolio of companies, and banks are also focusing on more immediate funding needs and the increased level of lending under the COVID loan schemes.
3. Some sectors are more impacted than others
The industries that have the potential for deals growth are those which are performing well during the pandemic, including tech, energy, food, online retailing, logistics and healthcare. The sectors that are likely to face a slow period in terms of deals are those that have been hardest hit, such as, construction, automotive and aviation, hospitality and retail. Of course, the longer-term impact on each sector remains to be seen.
4. Valuations are more challenging
The current economic uncertainty makes it more difficult to place a value on a business. Some businesses are facing reduced trading but with pent-up demand that may, in the future, offset current losses. Others are less robust or operating in a market that is facing irreversible losses.
The use of a business’ historic earnings is less reliable in the current climate than at more normal times because this retrospective data is unlikely to reflect the business’ current or future performance. A greater focus on management accounts and forecasts will be more relevant, although, of course, the assumptions relating to forecasts will need to be carefully reviewed.
Here at Thomas Westcott, we are using an even broader than usual range of methods to conduct valuations. Along with a host of other metrics, we are focusing heavily on scenario modelling, which shows a range of potential outcomes based on a number of different factors, to build a more accurate picture.
5. There are new opportunities on the horizon
It is impossible to predict what the future holds for the deals market, but there are likely to be opportunities for cash-rich businesses with a strong balance sheet further down the line. We can also expect overseas buyers starting to come forward, as some international markets pick up ahead of the UK and seek to take advantage of the low valuations of British businesses.
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