Almost 11 months into the pandemic, the COVID-19 impact on business has started to settle out. Surprisingly, despite the negative effects of COVID on the overall economy, middle-market M&A has been booming, with many investment bankers reporting record volumes in the second half of 2020. It’s counterintuitive that deal volumes have remained strong during this period, but I have observed three main drivers:

First, there remains strong liquidity in both debt and equity markets. Unlike 2009, the banking system was stable in 2020, and commercial banks are still looking to loan money to support transactions.  Private equity funds, and more recently SPACs, have also raised substantial capital over the past five years and remain eager to put that dry powder to work, regardless of the macro environment.

Second, with the 2020 election cycle complete and control of the Senate decided, many entrepreneurs will likely want to take some chips off the table and lock-in returns now to take advantage of current capital gains rates. Why now? Given the tax rate changes, it would take significant growth in a company’s value to offset the increase in taxes should capital gains rates move to an ordinary income-based rate. Whether significant tax reform is imminent remains up for debate, but many business owners are opting for certainty by exploring full or partial liquidity events now.  

Third, many businesses that have been neutral to or benefited from COVID-driven demand are looking to take advantage of a hot market. Many are seeing price premiums being paid in industries that have been insulated from COVID. While businesses that expressly benefited from temporary increases driven by COVID demand may not receive full value off of inflated earnings (sorry surgical mask manufacturers), showing resilience during this period is indeed a convincing argument to investors about a solid business model that can survive challenged macro environments. As one banker recently told me, “flat is the new up” when it comes to revenue growth during COVID.

On the flip side, the past year has been incredibly difficult for many businesses. Those in customer-facing industries that rely on in-person purchasing or experiences―restaurants, retail, entertainment, and hospitality―have rightfully been focused on keeping their businesses afloat rather than optimizing for potential transactions. Apart from distressed sales, there have been few business owners in these verticals looking to explore transactions during this period of compressed earnings. For these industries, I do not anticipate strong M&A demand returning until 2022, once operations have somewhat recovered and earnings have returned to more normalized levels.

What does all of this mean? For business owners who had been contemplating selling their business or seeking an equity investment but have had to put those plans on hold due to COVID, I would advise them to consider utilizing 2021 to lay the groundwork for a transaction process. Talk with your industry peers about their transaction experiences and start conversations with investment banks and advisors about your long-term plans and vision.

Often, business founders approach these coversations only when ready to transact, which can be a mistake. Starting these discussions a year or more in advance of an ultimate transaction process consistently leads to better outcomes. Increased lead time can help you to better prepare and position your company, as well as correct any potential issues that buyers may focus on. Shoring up the accounting function, conducting an annual audit or accounting review, and tracking additional detailed metrics are all items I typically see as areas for improvement during an M&A process, but each would have been more valuable to implement a year or two before a transaction.

As we enter 2021, there is finally light at the end of the tunnel. Vaccine rollouts, while slower than hoped, are now underway, and I anticipate that many Utahns will feel comfortable returning to stores, restaurants, schools, and the workplace by Fall.  With many companies and potential buyers forced to the sidelines for the past year, the strong market for M&A should only continue as confidence rises, companies rebound, and we gain increased visibility into the world post-COVID.