Is it the right time to buy a competitor or make a tuck-in acquisition?  Or, should your company be a tuck-in acquisition for a larger strategic buyer?

by Kenneth H Marks


No doubt, the market for buying and selling companies has been significantly impacted by Covid-19.  While about 11% of the middle-market deals closed last quarter (Q2 2020), most transactions have been delayed, killed, repriced, or restructured.  The uncertainty of financial forecasts for the near-term; change in supply chain and service delivery; and contraction of available debt have caused many buyers and sellers to hit the breaks or re-evaluate their plans. Valuations for the deals that did close or continued their process dropped on average by 12-14%[1].  As with most crisis, there are winners, losers and new opportunities …and we’re seeing the same dynamic with business today.  The M&A market has shifted from a seller’s market to a buyer’s market… especially for those that have cash to invest.

So how does your company benefit from or act upon these changes? And what’s the impact to your longer-term growth strategy?  If on the buy-side, how do you improve your competitive position and possibly help another business owner?  If on the sell-side, how do you navigate the downside risk of today’s market AND achieve your ownership, liquidity and personal financial ambitions.  Here are few observations.

We’re seeing a trend with some business owners who have concluded that the downside risk of continued organic growth, or in some instances continued operations, is too great compared to the opportunity to be part of a larger industry-related company with more substantial resources.  Well – – this is the classic concept of being a strategic or “tuck-in acquisition”.   This is especially attractive for selling lower-middle-market companies that have a small employee base, long-term customers, and possibly some intellectual property… AND in a valuation range that can be viewed by a larger acquirer (the platform company) as almost the acquisition of a department or team to plug-in or tuck-in to their operations.  In the past 8 weeks alone, we’ve touched three of these deals and see more surfacing.   These transactions are likely valued less than $5 million in deal value, have some supporting assets and occur where the seller is willing to share in funding the transaction with some type of contingent consideration or deferred payments (i.e. earn-out, royalty, commission, etc.).   We hear that seller motivation to act now ranges from plans to retire… to a need to restructure the company to operate at a lower level of sales… to newly created growth opportunities that require more capital than the seller can access.  From a buy-side, these small acquisitions can be a low-risk way to quickly add revenue, new talent, new customers, and new capabilities.  From either perspective (the seller or buyer), these tuck-in acquisitions can make sense in the right circumstances.

High Rock Partners is always gathering feedback to better serve our clients. We invite you to spend a few minutes completing the following survey to help us understand the impact the COVID-19 pandemic has had on your business. Thank you in advance.

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[1]  M&A Access Covid-19 Report Q2 2020 by the Alliance of M&A Advisors

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