Throwing Out the Playbook: A Look at Vetting M&A Targets During and Post-Pandemic– May 17, 2021 by Justin Thomas

I had the opportunity recently to participate in the 9th Annual Private Equity US Spring Forum virtual event. During our “Sourcing, Practicing Efficient Due Diligence & Downside Risk Mitigation” panel discussion, we had a candid conversation about the pandemic deal market and what the past year has been like — particularly what went into sourcing private equity investments and conducting due diligence in a remote, or at least physically distanced, environment.

While we each brought different perspectives to the virtual table, we all felt the same pains and frustrations and are glad to be (hopefully) coming out on the other side. Below are a few key themes the panel as a whole discussed, summing up our year and what lies ahead. Thank you Ernest Wechsler, our moderator; Eneasz Kadziela; Emily Pollack and Jay Rittberg for including me in the conversation!

Bumps or Blips? What was Temporary and What Would Stay?

When it came to doing deals over the past year, sometimes sellers made the call and took decisions out of our hands to wait on a transaction — whether they simply weren’t comfortable with the market or didn’t think their prior valuation would hold up. Other times, we had to just figure things out and get the deal done.

The latter option included assessing daunting factors no one could really answer, such as how long the pandemic would last and what that would mean for businesses. Private equity firms as well as due diligence professionals involved in a deal had to look at basic things that were never on our radar before, like the physical ability for employees to get into their facilities to provide services, or to make and ship products to clients.

However, one of the most important areas we had to assess, and will continue to assess at least for the foreseeable future, was whether or not the pandemic was making a temporary or lasting impact on the businesses we had poised for deals. That was difficult regardless of whether we saw the pandemic creating a “lift,” boosting companies that provided services or products critical during the crisis; or having a negative economic result, as many retail and restaurant industries experienced. Even when seeing positive markers in a business, the challenge became understanding the sustainability of it all.

There were more questions generally than hard answers. Even though summer and fall 2020 were still challenging, we began to see a rise in deal volume. We continued to do our diligence, analyzing the last twelve months (LTM) and Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) as reported by the businesses. But more questions emerged: What would 2021 look like? Would the “new normal” bring substantial and ongoing positive change to companies that had done well, such as home improvement stores? Or were those types of bumps in business simply a blip — and going forward their profits and growth would be more reflective of their 2019 numbers? We are still asking those questions today.

A New Lens for Valuations and Evaluations

Pre-COVID valuations in general were certainly high. And while that really hasn’t changed much throughout the pandemic, the framework of how M&A professionals, private equity firms and owners are thinking about the value of companies is very different — scrutinizing the blips and bumps, adaptability and technology of a business, and other key areas more intensely. Insurance professionals, while typically not integrated into a deal, now found themselves partnering with due diligence teams to better understand business changes and challenges so they could properly insure deals happening in an unprecedented time for risk and uncertainty.

There were other critical evaluations happening in addition to the monetary worth of a business. Would remote diligence to assess a target’s management team really work? Was it enough? Again, more questions. Most of us found while more touch points were required when making remote connections, it could be done efficiently. However, to make the enormous decision to acquire a company and understand everything it takes for that to be successful still required some in-person connection. Many in the industry got creative in getting people together safely to gauge both chemistry and commitment. From masked site visits to walk the floors and understand how an industrial facility operates, to outdoor meetings with the CEO to more deeply connect and grasp their company culture, these in-person interactions were critical to investing in businesses and the people that make them successful. On the financial diligence side remote work has been highly effective, yet we also found you can never quite replace seeing the state of inventory or operations live and in-person versus a Zoom call.

Still on a Rollercoaster?

As we begin to cautiously emerge from COVID and continue to analyze the blips and bumps and what occurred over the past 12-plus months, the next series of questions becomes: Should we expect another set of changes in how businesses will perform? How we will value them? Can we still rely on LTM when we are anticipating a bump in the economy with businesses reopening and restrictions lifting?

Still more questions than answers. But in the M&A space, we’ve weathered the eye of an unexpected storm and come out on the other side stronger, more inquisitive and with our eyes open to different ways of doing things and new questions to ask as we tackle the next big opportunity.

Contact Justin Thomas at or a member of your service team to discuss this topic further.

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