Looking Beyond the Storm Clouds: Perspectives for a Business Owner

March 24, 2020
Ajit George and Carson Christus of BBH’s Corporate Advisory Group discuss the impact of COVID-19 on businesses and explore how owners can respond in these challenging times.

The world is in the midst of a crisis unlike any other in recent memory. Governments and monetary authorities across the globe have already taken significant steps to stanch the bleeding, with additional measures expected to follow. These are indeed extraordinary times and businesses large and small face unprecedented challenges. What makes the current situation more palpable is the fallout not just economically, but socially. Protecting the health and safety of our loved ones is paramount, and it is our daily interactions in our communities that make us human. Consumer confidence, which is the bedrock of the economy, has been shaken. The difficulty in the current environment is coping with all the uncertainty. How long will the virus take to run its course? When will things get back to “normal”? At best, not only the U.S., but the entire world is headed toward a temporary economic slowdown; at worst, there will be a prolonged recession. These are the somber realities that we face.

Despite a relatively short timeline since the first case was diagnosed in the U.S., businesses here have already begun to feel the impact of this pandemic. Tightening travel and quarantine restrictions around the country have had ripple effects across all industries. Many businesses have been thrown into crisis mode – juggling management of remote workforces, adjusting daily operations to best serve customers and rethinking budgets. For all companies, the outlook for 2020 has changed. Government and monetary authorities have implemented stimulus measures not seen since the Great Recession. Meanwhile, financial markets have experienced significant volatility with adverse sentiment now seeping into private business activity.

This upheaval has extended to corporate finance markets and impacted businesses currently pursuing or even contemplating corporate transactions. Current observations of the lending and merger and acquisition (M&A) markets can be characterized by a marked slowdown and increased caution. While bank balance sheets are solid relative to the last financial crisis, many banks are more focused on supporting current loans. Lending terms on new opportunities have become more stringent (e.g. higher rates, lower leverage, stricter covenants) to reflect the increased risk from the potential disruption to businesses. The M&A market has cooled down significantly in recent weeks, as participants wait for the dust to settle. Timelines to complete deals are being extended, as management teams refocus on their existing operations and postpone diligence items such as site visits. Transactions nearing completion face some risk to close, as buyers require additional diligence and financing providers renegotiate terms. Anecdotally, many new transactions that were expected to come to market are being delayed indefinitely as business owners adopt a “wait and see” approach. Financing for deals is drying up, primarily as a result of increased caution being taken by lenders, who are beginning to require more equity financing from buyers or implementing delayed draw1 structures to reduce risk. There is also an increasing valuation disconnect, with sellers anchored to recent market highs, while buyers are bidding more cautiously, given the general uncertainty around near- and medium-term forecasts. This cautious environment is expected to continue for the foreseeable future.

In turbulent times like these, it is important to remain levelheaded. Indeed, the most successful companies are often the ones that look ahead to the medium and long term. This is a crucial time for stress testing and scenario planning, including thinking through alternative sources of liquidity, identifying substitute sources to stabilize supply chains and reassessing the company’s organic growth strategy. The most stable companies require resilient workforces that are customer oriented. Well-capitalized businesses with an extended horizon may even consider pursuing acquisitions if they have a list of targets that are ripe for consolidation and the liquidity to do so. Crises often shake companies out of inertia, compelling them to rethink how their business can be optimized – developing new sales channels, identifying efficiencies through technological improvements and even witnessing the next generation of leaders step up in the organization. Though painful in the short term, through preparation and focus, these challenging times often provide opportunities for businesses to innovate and optimize for a brighter future ahead.

1A feature of some lending agreements that allows a borrower to only draw specified amounts of capital from a total loan amount during specific time periods.

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