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The State of Play and Buy-side M&A Process in Times of COVID


Alex Cater, Principal and Pang Wichiantiab, Associate


Despite COVID-19, there has been a considerable amount of investment directed to businesses and many companies and private equity firms are still seeking ways to deploy capital to acquire businesses. We wanted to highlight some of the types of buy-side transactions that are currently taking place in the market. When investing in an equity deal, investors must decide if they will invest to be a majority or minority investors. In certain cases, the investor may be limited in the amount in which it owns due to regulatory restrictions or preestablished voting rights associated with the capitalization table. However, there are a few ways in which a buyer can structure a transaction to effectively control the business without owning a majority of the shares (i.e. common vs. preferred shares) or control the cash flow or governance of the business despite who is listed as the owner of the majority of shares on paper. On this topic, we will cover the foundational ways in which buyers conduct transactions and the process for closing those transactions.

Stock Acquisition – Individuals or companies that purchase shares of a company in exchange for equity. Most venture capital and growth equity deals engage in a stock acquisition for a minority ownership of a business and be for either common or preferred stock. In many cases, a single company is unable or unwilling to gain an outright majority of shares but may be able to receive a preference – a priority to receive a certain amount of revenues / profits based before any other owner earns money from the investment. Preferences are used for investors to limit the risk associated with the investment by ensuring that the business pays the investor back within a certain amount of time.

Buyouts – Gaining majority ownership and control of a specific business through a combination of equity of debt.


  • Management Buyout (MBO): The existing management team (CEO, CFO, CLO, etc.) generates funds to buy the business from a private owner based on an established price. This type of transaction is common for owners who would like to transition into retirement.·

  • Leveraged buyout (LBO): A buyer obtains a loan to acquire the business and uses the business’s assets as collateral in case of default. This transaction is often used to reduce competition for the buyer to realize greater control over pricing and distribution that ultimately will lead to higher profitability.


Current M&A Landscape

With low interest rates globally, there has been a high amount of liquidity in the market which has boaster M&A and private equity markets amidst a global recession caused by COVID-19. This liquidity has provided much-needed financing to support LBOs in industries where either demand is less affected by or increases due to the effects of coronavirus such as the pharmaceutical industry and the staple components of the food & beverage industry. As a result of higher liquidity in the market, valuations have varied substantially relative to their historical trends. Nowhere has this been seen more than in the public markets where the trailing-twelve-month price-to-earnings (TTM P/E) ratios have increased on average by almost two and a half times what they were at the end of year 2019. Even though the same liquidity exists for private equity funds and investment firms, there have not been substantial changes in the valuation multiples for acquisition targets to date. For earlier stage companies, angel investors and venture capital firms will make valuations based on their required rate of return upon a future exit and anticipated future dilution. Furthermore, corporate development divisions remain relatively conservative when evaluating potential acquisitions and joint venture investments that will create value for its business units and shareholders.–Despite the recent changes to the investment landscape, the buy-side process to evaluate investments remains intact for venture capitalists, growth equity firms, and corporate development entities. Below is a step-by-step process overview checklist for each of the steps required when sourcing and evaluating deals from the buy-side perspective:


Buy-Side Deal Process Overview

Phase I: Target Identification and Engagement

1. Initial Outreach to Target: Proactively engage with the owners of various businesses to gauge their interest in selling a share or ownership of their business. Potential acquirers may also receive an invitation to bid if the business owner is actively seeking to sell the business. Once interest is established, the parties engage in a confidential agreement (i.e. non-disclosure agreement, etc.) to protect the information of the business and the acquirer’s intent for the business.

2. Initial Discussions: Once interest is established, the parties engage in a confidential agreement (i.e. non-disclosure agreement, etc.) to protect the information of the business and the acquirer’s intent for the business.

Phase II: Preliminary Diligence and Valuation

1. Information Gathering: This includes gathering key information about the business such as the location of the business, employees, financial statements, revenue model, key personnel, and other key components of the business. The goal of this step is to understand the mechanics of the business, how it operates, and its determinants for success.

2. Establish Preliminary Valuation: The acquirer should establish a valuation based on the historical financials of the business and the acquirer’s expected return on investment from the target. The value of the business is referred to as “enterprise value” which is the sum of the equity and debt less any cash. More about this in the following section.

3. Submit Indication of Interest (IOI) A formal letter that outlines an interest to purchase a company at a specific price given that the business fulfills certain criteria. Buyers usually assess issues such as litigation issues, tax requirements, IP protection, and competitive defense. On the other hand, sellers are concerned about the financial ability to close a transaction, transaction tax consequences, closing speed of a transaction, and buyer’s intention.

Phase III: Advanced Diligence and Letter of Intent This is the seller’s decision to advance with the buyer based on the information provided and the interest to sell the business.

Phase IV: Final Diligence, Negotiations, and Transaction Close

1. Conduct Full Diligence and Letter of Intent: The full diligence process validates the buyer’s assumptions with more detailed information. To validate if the buyer: A) should make the acquisition? B) at what price? C) how should the deal be structured? D) How to navigate post-acquisition?

2. Arrange and Secure Financing: Leveraging limited investor funds, bank financing, and/seller’s note to secure the deal according to the terms within an agreed-upon time is crucial to advance.

The most common methodology for conducting valuations are:

  • Discounted cash flow analysis (DCF): Income-based based on free cash flow and using a “discount rate” to estimate the current value of the business. The discount rate represents the total risk of a potential investment, which is the bank interest rate plus the opportunity cost of pursuing an alternative income-earning project. The discount rate can vary greatly depending on the industry and state of the business.

  • Leveraged buyout analysis (LBO): Similar to DCF but includes the cost of using debt to purchase the company.

  • Comparable public company analysis: Based on P/E multiples of similar companies that are traded on a stock exchange.

  • Precedent M&A transaction analysis: Leverages P/E, EBITDA, or other multiples based on other private sector transactions of the same industry, growth rate, or business model.

  • Replacement value or “Sum of the assets”: Assesses the cost required to reconstruct the business as it is at the time of acquisition.

Buying a business is a significant process but can be a rewarding endeavor with proper planning and a sound due diligence process. Generally, the M&A process and valuation is not a purely “black or white” but rather an analytical process but a combination of analytical and subjective evaluations that includes creativity and a personal approach to ensure that trust is built from both the buyer’s and seller’s side of the deal.


You can learn more about valuations and the deal process by reaching out to a CIG investment specialist by submitting an email to bd@caterinvestments.com, submitting a request to the “Contact Us” section at www.caterinvestments.com, or calling our office at +1-217-330-5795. We would be more than happy to share more about our investment process and how we support clients on both the buy-side and sell-side to close successful transactions and enhance operations to increase value for stakeholders.

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