Deep concern gripped the M&A market in the spring of 2020. At the start of the pandemic, many feared falling corporate valuations and a resulting decline in transactions. Some even thought a complete collapse of corporate sales could not be ruled out. With the exception of a few individual industries, the situation unfolded differently, and the big crash never materialized—at least not yet.
“After a lull in March/April 2020, we did not observe a significant decline in corporate transactions and see that planned company sales continue to take place without any negative impact on the price,” explains Nicolas Rädecke, managing partner of the German Business Exchange DUB.de.
This is evidenced by the EBIT multiples, which help determine a company’s value. Prices for small and medium-sized enterprises (SMEs) have hardly changed since spring 2020 and remain at a consistently high level.
Calculating enterprise value:
Adjusted EBIT × Multiple = Enterprise Value
We regularly publish EBIT multiples on DUB.de specifically for SMEs. These apply to companies with annual revenue of up to 20 million euros and are based on recently completed transactions.
A multiple is calculated by dividing the enterprise value by adjusted EBIT (Earnings Before Interest and Taxes; profit before interest and taxes, but after depreciation and amortization).
The calculation takes into account the net purchase price as well as assumed interest-bearing liabilities and other purchase price adjustments. In addition, adjusted EBIT reflects the sustainability of operating results and accounts for one-time charges, such as costs associated with a current legal dispute.
The consequences of the crisis:
So far, little impact on the M&A market
“Transactions that have already begun are generally being carried out as planned. In rare cases, a project is put on hold; cancellation is the exception and is limited primarily to industries directly affected by the COVID-19 crisis,” says Gunter Klippel of con|cess, a consulting firm specializing in corporate brokerage.
“Only the sectors particularly affected are currently seeing virtually no transactions because, from the buyer’s perspective, there is hardly any demand, and sellers do not want to offer and sell companies that may be in distress below market value. In this context, ‘distress’ refers to a collapse in operating business. Thanks to government support measures, the liquidity situation of many companies—even in crisis-hit sectors—remains, on average, very satisfactory at present, and the expectation sometimes expressed that companies could be acquired at a bargain price following insolvency has not yet been realized.”
What developments can be expected in 2021?
“As the spring of 2020 showed, developments and their consequences for the M&A market are extremely difficult to assess, and the market will continue to have to cope with this exceptional situation,” said Rädecke. Given the increasing reluctance to launch planned divestitures, recent developments could impact the number of corporate transactions. A reduction in company sales and the resulting decline in supply could even lead to a rise in current prices, despite the pandemic.
