SEARCH DURING COVID
Hello everyone! I just wanted to ask about your experiences during the past year due to COVID19. What have been your most challenging situations? Raising funds for your searches and/or getting investors on board during this past year? Meeting up w(or even identifying) potential sellers? I'm looking forward to hearing from you!
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During the search phase, I've found that many owners, he COVID economic and health crises are a catalyst for thinking about life outside of the business, including transition/retirement. However, many, especially those that had adverse impacts due to COVID, are putting off selling until things stabilize. Additionally, companies that grew or were stable during Q1-Q2 2020 are somewhat emboldened to ask for higher valuations due to fewer sellers, lower rates driving asset prices up, and recent data showing their business can weather economic turbulence. On the plus side, most people put off travel/in-person meetings until closer to or after an LOI, so it's been easy to stretch the search capital.
I expect to see a major impact during the equity raise as Daniel noted above. Search investors have always focused on predictable repeat/recurring revenues, which has only increased post-COVID. I'd recommend spending additional effort on cohort analysis and similar exercises pre-LOI.
I actually launched my search in Oct 2019 and put it on hold in Apr 2020 due to Covid. I was fortunate to be self-funded at the time, so pushing "pause" was really easy. I re-launched in Jan 2021 and am raising a small amount of capital this time around. I've found the conversations with investors to be optimistic overall. Additionally, Covid has had the side effect of expanding my potential investor pool since hopping on a Zoom call and not having to be in person is much more accepted at this point. I've been speaking with potential investors both in and outside my market.
On the dealflow side, honestly, it's been great from a buyer perspective: Covid has filtered out a lot of the low-quality dealflow I was seeing last year; 2020 financials are now in, so it's fairly easy to see where Covid has negatively or positively affected a business; and knowing that most companies have been remote and that's now a cost-saving option if the company has remained productive has been helpful as well. Finally, my thesis in relaunching was that all of the potential sellers in 2020 put their sale plans on hold while a lot of the potential sellers I had spoken with who were wanting to "stay in the business for another 3-5 years" might be thinking about an earlier-than-anticipated exit. So far, that seems to be at least somewhat true: We're seeing a lot of good, high-quality dealflow in our market.
One more thing that we haven't taken advantage of, but might be of interest to others: My sense is that we may see more deals with real estate as part of the purchase as a result of Covid. Given some of the favorable lending provisions under SBA when real estate is part of the deal, if you're not opposed to a real estate + business purchase (we tend to avoid them), that could be a really interesting opportunity.
A whole lot of art on LMM accounting.
Some of this is probably facilitated by the unknown of the COVID era economy. Owners that may have been[redacted]months out from selling are suddenly ready to rock and roll.