Can Firms Grow or Add Liquidity in the Post Pandemic Environment?
by by Steve Sherman May/June 2020
A mid-year analysis by the Congressional Budget Office marked down its 10-year forecast for the U.S. economy (2020-2030), finding that it could take about a decade to recover fully from the coronavirus pandemic and related shutdowns. This grim analysis was put forth as other surveys showed that, although the pace of economic deterioration slowed as virus-related restrictions moderated, the sentiment from economic experts remains negative.
No one has a crystal ball to know how the next 12 months and beyond will look. The rapid global shutdown due to the COVID-19 outbreak and the ensuing economic collapse is a reminder to expect the unexpected. However, many firms in our industry have a great opportunity to grow strategically and profitably in their desired market by following a rigorous strategy and doing the right analysis.
It is important to balance growth while conserving capital. Doing so enables a company to operate from a position of strength no matter what economic conditions it may face. In addition to ensuring that your company will survive economic uncertainty, preservation of capital also affords the opportunity to take advantage of buying opportunities when they make sense from both a strategic and tactical position.
At CrestMount Advisors, we advise clients to take stock of their business profile by both financial and strategic criteria. Are they growing profitably? Is their customer mix optimal for the markets they serve and want to be in? Do they have the correct skill mix among their management team? Now is a good time to look for purchase opportunities within markets they want to reach or are already serving. For the moment, sellers’ pricing expectations have lessened. There are interesting and attractive opportunities to increase volume in your operations and effectively diversify in related ways. We frequently advise clients to sell assets and businesses that are less attractive to conserve capital while buying into strategic growth markets. Given the low current cost of money, assets and companies can be purchased at a price that works for both the buyer and the seller.
Our team considers several factors when a client is making a purchase decision:
Does the acquisition meet strategic, financial and underwriting objectives?
How does the acquisition contribute to the current customer mix?
How does the acquisition contribute to the capabilities of the company?
Does the price meet the goals of the buyer and satisfy those of the seller?
Is it the right match in terms of corporate culture, risk management and the long term company vision?
This is also a good time to shed assets and deploy that capital in better opportunities while lowering credit risk. We are seeing buyers through this pandemic with both performing and distressed assets at attractive prices for the seller.
If you want to add liquidity by shedding a sub-optimal asset, there are buyers seeking to purchase assets that fit their goals. These are buyers willing to pay full market price for performing assets and what we believe is a reasonable discount for non-performing assets. Valuation comps are best viewed as a guide and not a strict rule. We find that the terms of a deal are more determined by the situation of the buyer and the seller and less on comps. It is important to identify as many potential buyers as possible to create the maximum leverage. This applies whether you are selling a portfolio or a company.
Price is only one factor in a sale. Often, the availability of lower cost capital, technology, a larger balance sheet or other resources offered by the new partner allow a company to better serve its customers and vendors, extend more credit and more effectively grow the business profitably. In many recent engagements, working closely with our client’s leadership, we were able to find an investor or buyer that matched our client’s values, achieved all of their objectives, and increased their market opportunity. The result is a new relationship which expanded the capabilities of each company. The sum of the parts was greater than what would have happened if the client had remained independent, which is a fundamental test of a transaction.
The economic impact of the COVID-19 pandemic will not be completely mitigated until the virus is contained and an effective vaccine distributed, but even then, the recovery will be long and often uncertain. However, there will continue to be opportunities to grow, add liquidity and create strategic advantage within our industry, particularly for those firms that recognize how best to strengthen their positions whether it means shedding underperforming assets or acquiring the right assets or businesses.
Headquartered in Madison, New Jersey, with offices in Pennsylvania and California, CrestMount Advisors specializes in mergers and acquisitions debt and private equity financing, and strategic advisory services. Their seasoned management team has significant financial transaction expertise and operating experience. They understand the commercial finance business as operators and pride themselves in satisfying all of their clients’ goals and objectives by executing transactions that achieve the desired results.
Scott Nelson, Chief Digital Officer, Tamarack Consulting
While it is too early to define the new normal, one thing we can say for sure is that the rule “past performance does not guarantee future returns” has never been more true. Scott Nelson explores how real-time data can reflect a customer’s current financial health and reduce uncertainty about the future.