COVID-19 has created uncertainty and resulted in major economic changes, which has had a chilling effect on the economy, M&A deals and capital market transactions. Deals and financings (including IPOs) that were in process at the beginning of this year are now paused. Companies and investors are looking for answers about how to prepare for the future.

Before COVID-19 hit, M&A was on a roll, driven by an 11-year bull market, but with the pandemic onset, companies moved quickly into a triage situation as revenues rapidly declined and physical offices shut down due to stay-athome orders and viability uncertainty. Meanwhile, banks have sent conflicting messages about lending.

With the new COVID-19 reality, companies need to reassess their situations and pivot appropriately by maximizing cash flow, re-forecasting earnings and defining mid-term and long-term activities and strategies.

MAXIMIZE CASH FLOW

As management teams and dealmakers are slammed with conflicting information and still determining priorities, there is an opportunity to assess financials and cash flow.

Companies should analyze profit and loss (P&L) statements to understand revenues, costs and expenses and reassess sales seasonality for products or services. Mostly importantly, companies need to project a short-term (13 weeks) and midterm cash-flow analysis. Collecting receivables, using available credit facilities and making rational expense decisions are all necessary in uncertain times. Companies should look where sales or other income sources are coming from and their profitability and review cost of goods sold. Some of these expenses could be reduced. A review of fixed versus variable overheads is need to evaluate what decisions need to be made. Net income and profit margin should also include variable levers to configure as needed, such as with labor, materials or advertising.

Many vendors and creditors are willing to negotiate payment terms and extend them over longer periods or lower interest rates. Similarly, businesses should review bank covenants and discuss changes with lenders. Stress testing revenue and expense scenarios to highlight potential covenant or payment challenges will arm owners with actionable information.

It is often natural in these times to make emotional decisions that have the greatest immediate cash-flow impact. However, consulting advisors helps owners make necessary and balanced decisions. Outside advisors offer a fresh perspective and remove emotions from hard decisions. Decisions made during these uncertain times will have long-term effects well past the end of this crisis.

RE-FORECAST NEAR-TERM EARNINGS

For the foreseeable future, earnings will change. Looking at profitability and cash flows will help in decision-making. Businesses should look at existing shortrun forecasts and P&L to help reassess expenses. There will be areas that can be trimmed or changed to maximize earnings projections.

DEFINE MID-TERM AND LONG-TERM ACTIVITIES

Companies should also be looking at ways to improve financials and operations for the new reality that will result from COVID-19.

  • Value Planning: Companies should access what they thought they had versus what they actually have. It helps define, clarify and agree on a clear hierarchy of what is most important for success in the future, plus it helps assess cost sources and limitations.
  • Revenues: Assess whether products are addressing all of the markets they could access, determine if new customers can be gained due to competitive disarray, realign sales organizations and assess R&D functions to determine if new products under development are still relevant and can be rapidly deployed.
  • Supply Chain: Companies may be getting low-cost materials from places overseas that have been severely impacted by COVID-19, and this would be a good time to re-think lost profit versus longterm profitability. Supply chains will realign after this is all over; management teams are well advised to be in front of that realignment.
  • Business Re-Tooling: When possible, companies could consider downsizing facilities and embracing virtual work. This frees up operating cash flow and may change the mix of employees needed to run the business. It is also a good time to look at existing vendors and make decisions on adding new vendors at better terms. It is also appropriate to reassess capital sources and structure.

With the M&A market changing, buyers have opportunities to adjust terms and sellers may need to accept a lower valuation. For all, it is best for business leaders to take emotion out of the equation and take a hard look at operations and financials.

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Anant Patel

Anant Patel, CPA, has over 25 years of public accounting experience and leads both the Firm’s Advisory Services Practice and Transaction Advisory Services Practice and is a member of the Executive Committee for GHJ. He advises in the area of mergers and acquisitions and provides financial due…Learn More

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David Horwich

David Horwich has worked as an investment banker and advisor to both public and privately held businesses for over 30 years. David provides his clients with a focused, integrative and transparent approach. David has advised clients in all facets of transactional activity, including raising capital…Learn More