The Big Business Of Small Business M&A

The unexpected impacts of the coronavirus crisis continue to pour into the market, one of them being a flurry of mergers and acquisitions (M&A) activity.

The first quarter of 2021 saw $1.3 trillion worth of deals, data from Refinitiv said, a whopping 94 percent increase from the same quarter of 2020. Analysts expect this surge to continue in the year’s second quarter as well.

Researchers have pointed to an environment of affordable borrowing and a booming stock market as key factors behind the activity, which has also led to a surge in businesses going public via mergers with special purpose acquisition companies (SPACs). Recently announced moves like Microsoft’s takeover of Nuance and Grab’s SPAC deal, continue to drive M&A excitement.

But for small to medium-sized businesses (SMBs), there is more than meets the eye when it comes to the impact from COVID-19 on M&A interest. Mike McIsaac, CEO and managing director, Baker Tilly Canada Corporate Finance, spoke with PYMNTS about some of the biggest factors driving SMB M&A activity in Canada, the U.S., and beyond.

COVID Complexities

Despite the initial uncertainties and anxieties surrounding the pandemic, businesses’ rebound towards the end of 2020 and into 2021 was quite strong. McIsaac noted that private equity firms are now looking to catch up on the business they may have lost last year, and that means hunting for buyouts.

But historically, investment bankers have overlooked the SMB segment.

“They focus on much larger transactions and public transactions,” he noted, adding that deals around $10 million and below tend to attract far less attention from business brokers. At the same time, however, deals involving small to medium-sized businesses still need a sophisticated approach to deal-making — especially in such unprecedented times.

There are a variety of ways the pandemic has influenced SMB M&A activity — some good, and some a bit more challenging.

Businesses’ acceleration of digital transformation, for instance, has created an environment in which parties involved in M&A activity may not be on the same page in terms of technological maturation. It can present a complex environment that hampers business continuity: understanding how to streamline and integrate various back-office functions of two separate entities is rarely straightforward.

Likewise, an SMB with a banking partner that may not be as digitally savvy and agile as competitors can also greatly slow down and disrupt the merger process.

At the same time, this transformation has created new opportunities for some acquirers.

“The fact that a company’s ahead of the curve on utilizing technology will create opportunities for them to acquire companies that have lagged behind in technology,” McIsaac noted.

The 2020 Outlier

The pandemic has influenced small to medium-sized business M&A in other ways as well. McIsaac said, for example, 2020 created an environment in which baby boomers became more eager than ever to retire and therefore ready to sell their businesses. The potential for changing tax legislation in various markets like Canada and the U.S. may also entice some business owners to consider a sale.

But amid the nuances of digital transformation and tax reform, broader questions surround the impact of last year’s Black Swan event on M&A activity.

Among the most pressing involves the debate over how to analyze the performance of an SMB amid such a volatile market — if at all.

“It’s challenging for advisers to come up with COVID normalizations and forecasts that may or may not include the impact of COVID,” said McIsaac. “There isn’t much data on how you would normalize for something of this grand scale … a lot of times we’re trying to argue to just take 2020 out, and look at the years before, and look at 2021, and focus on where the business is at.”

It’s a challenging debate for the SMB ecosystem, considering some businesses relied heavily on government aid merely to scrape by while others enjoyed outstanding performance.

Overall, McIsaac said the environment is on the seller’s side.

“If you’re a healthy company, … [there’s] tremendous competition for purchasers, and there’s better valuations than we would have had a year ago today,” he said.