A ban on what??
Temporary M&A ban??
The juice is worth the squeeze, read to the end,
The effects of Covid19 have left many small and medium sized businesses grasping for capital to stay afloat due to the government mandated shut down and the following economic fall out. The worst could be yet to come as the second round of Paycheck Protection Program funding reaches banks only to be a lift ring thrown too short to bring small businesses to safety. The first round of PPP funding consisted of a $350BB liquidity injected into capital markets by way of SBA 7a forgivable loans. The resulting first round of funding equated to 1.66MM business receiving the $350BB in a matter of two weeks, and a matter of days for some lending institutions. JPMorgan Chase Quoted, “We ran out of funding in 5 minutes” receiving over 60,000 PPP applications. Bank of America quoted, “On the first day we received 10,000 PPP applications per hour”.
The Paycheck Protection Program is a large puzzle piece to the CAREs act $2.2T stimulus package, and is on a first come first serve basis. Meaning if you were not able to get your application in the earlier stages of the program coming online, you’re not likely to get funding. The second round of funding, another $480BB has been signed by the president and should be on it’s way to lending institutions as we speak. A lot had changed in recent weeks as the stay at home order had drawn out longer than most predicted and the economic fall out that follow has been devastating to small business around the country. A lot of business owners I’ve spoken with did not initially seek PPP funding and have tried to weather the storm without taking on more debt. As the lockdowns have droned on and the gravity of the situations set in a lot of those who initially passed on seeking assistance have decided to purse funding to save their business and keep their employees paid. With lenders running low on capital and liquidity markets in turmoil due to ramped up demand there are few places for small business owners to turn for cash.
With Speculation that the second round of PPP funding could dry up in a matter of 48 hours, business owners are looking through their rolodexes searching for a life raft the cling to. The PPP program has been ripe with glitches as the likes of the L.A lakes, Ruth Chris, ShakeShack, and some other 40 publicly traded companies receiving SBA 7a PPP forgivable loans intended for small cap companies with under 500 employees. Take note, a lot of these companies have returned the funds to their lenders as many trigger happy CFOs embarrassingly applied for a program that wasn’t designed for them. The fear of The Treasure running out of “ammunition” has led business owners to consider other form of capitalization to keep the lights on and their employees paid. One of those options is partnering with private equity.
Daily since the start of the PPP funding issues, my inbox has been filled with emails titles equating to, “We have dry powder and in search of opportunities” from Private Equity Groups “PEG” in search of opportunities to invest in lower middle market companies as well as larger main street businesses. Privates equity firms and larger companies alike are coming to the rescue with Merger & Acquisition opportunities as well as divestitures, stock buy outs, earn outs, and capital loans. The role of a business broker is to work hand in hand with PEG, investment bankers, and larger companies to locate a M&A opportunity inline with their criteria and vision. PEG have voiced that they have plenty of “Dry powder” liquidity to inject in the market in the form of M&A or divestiture models, keeping the original owner in a leadership role of their companies while giving them the cash to live to fight another day. This Is the dream of many business owners who’ve fought in the trenches for years to growth their idea into a thriving business but always lacked the liquidity to manifest their true growth potential. The opportunity exists for owners to stay connected to their business, while no longer having to bear the full weight of ownership by themselves. M&A opportunities could very well be the sole option for many companies to weather the Covid-19 Storm and stay afloat through 2021 keeping rising unemployment at bay.
The law of supply and demand. As M&A demand for essential businesses rises, so do the valuation multiples used to calculate a company’s value. As many CRE asset classes suffer from rising cap rates, waning cash flow and higher vacancies, business valuation multiples will increase for in-demand companies as well as companies inline with vertical merge and consolidation opportunities. This environment could be the prime opportunity for many owners to seek retirement through the sale of their company or step back by taking on a partner through a merger. My speculation is the valuation multiples for mainstreet companies will stay stable or increase as many of those who’ve been employed will seek opportunities to be self-employed. With tax deferral programs to invest 401K funds into a business, many Americans will feel their retirement savings safer in their own control. Record high unemployment, record high market volatility, and economic uncertainty have many Americans seeking to purchase or start their own business as a better alternative than their current 9-5. These factors create a great opportunity for any business owner seeking to retire. If you have ever considered selling your company, have questions about retiring as a business owner, or would like to know more about purchasing a business, please click HERE.
Que evil villain music. There are two politicians that want to see American small business struggle, and one in particular that voted against funding the PPP round two. Actually, the sole house democrat to vote against the second round of PPP funding stating “the program did too much for businesses and not enough for individuals” Alexandria Ocasio-Cortez. “Elizabeth Warren and Alexandria Ocasio-Cortez seek to propose a bill, the Pandemic Anti-Monopoly Act which would impose a moratorium on deals by companies with more than $100m in revenues or financial institutions with a market capitalization above $100m. The bill also aims to block deals by companies backed by private equity and hedge funds, and seeks to protect groups that hold patents that could be crucial amid the pandemic, such as for personal protective equipment. The bill is unlikely to gain traction in the Republican-controlled Senate or with the White House. However, it could pile pressure on presumptive Democratic presidential nominee Joe Biden, a centrist who is looking to shore up support from the younger, left-leaning Democrats who supported Bernie Sanders in the party’s primary process.” - Financial Times
The proposed bill would cut off Private Equity Group funding for companies looking for a life line as PPP fund runs dry. Ocasio-Cortez’s fear is, “Vulture PEG will gobble up struggling companies” as she stated in her speech to congress Tuesday April 28th. AOC has continued to show her misunderstanding of economics, free market structure and the law of supply and demand. As demand goes up for strategic companies positioned to capitalize on Covid-19, the multiples PEG are willing to pay to align with these companies will increase. In regards to companies struggling to get a grip on their hemorrhaging cash, private Equity could be there only option if PPP can’t be funded. I’m not sure where she indents for them to seek funding.
If AOC is unwilling to vote in favor of funding small business PPP loans, as well as unwilling to see owners seek funding from PEG, she has made her stance on small and middle market business very clear. AOC and Warran have a history of villainizing American business owners, as well as pursing government over reach. A temporary ban on M&A deals subject to the size of the buyer is a blatant over reach and tampering with our already stretched thin American business owners. Restricting the ability of business owners to seek buyers or investors for their companies would crush business valuations, including the valuations of companies that are traded on the NYSE. In the trying times we find ourselves in now, many companies are planning to whether the storm by seeking M&A opportunities to strategically position and vertically integrate themselves with companies that align with their mission and purpose. These mergers can be the make or break to company valuations, these same valuations structure that drives P/E ratios and stock prices. “The sum is greater than its parts” adage drives stock prices for publicly traded companies as well as EBITDA for lower middle market private companies. A strong M&A market can be the key to breathing life back into the bruised and bloody stock market and economy. But that’s another conversation for another day.