Despite the uncertainty of COVID-19 spread happening at the time of writing, one thing has become clear, the economy is resilient and the automotive industry’s key metric of miles driven has been growing strongly since mid-April. Numerous data sources suggest the automotive aftermarket appears to be in a strong position in a market sense.
Over the past 30 days (which feels like 30 weeks that flew past in 30 minutes), we have seen a shift in conversation away from the paralysis of economic anxiety towards an intensifying desire to restart deal making.
Tom was correct in last month’s Partner Notebook when he said that a key analytical hurdle to getting deals done will be three to nine months of financial statements as we come out of the COVID-19 pandemic. The challenge is that the starting date for that clock is still not clear.
Absent a milestone event like a vaccine, the willingness to return to some sense of “normal” is an individual decision based on personal risk assessment and the impact COVID-19 has had in the geographic area in which you live, as well as the immediate circle of people you interact with frequently.
The subject of travel is an easy way to illustrate this reliance on individual decisions. It is the exception and not the rule that deals will be done without deal parties meeting in person face-to-face. The challenge of comprehensive Due Diligence likely also rests on the necessity of travel.
Few buyers will find Zoom sufficient to assess, build trust, and develop a relationship with a management team and vice-versus relative to a sellers’ confidence in an acquirer. Technology has provided us a means to continue to advance the ball, but at a slower rate. I am thankful that we have the resources we do, but a broad willingness to accept video conferences as a direct replacement for travel may still be off in the horizon. For the time being, replacement of in person face-to-face interactions will continue to be a challenging environment to operate within.
To further illustrate this point, I recently spoke with two different colleagues holding vastly different personal views on the risk associated with travel. The first was not comfortable flying until January of 2021, period. The second needed to hang up quickly because his flight was pushing back from the jetway. Both agreed that they would not consider acquiring a company they did not visit in person.
Absent travel restrictions and advisories, a willingness to fly, stay in a hotel, and rely on restaurants for food preparation is a deeply personal decision at this point. Still at this juncture, the ability to travel to a business location remains critical to understanding a business and gaining the confidence necessary to champion a deal to successful conclusion.
For sure there are and will continue to be institutional requirements created as investors and lenders will need to develop standards to evaluate risk, market performance, and reliable valuations. However, the process starts with individuals pursing, championing, and driving a deal through these institutional requirements.
When does the clock restart to begin pursing deals aggressively? It appears there is no universal right or wrong answer. While we pour through and focus on the data, uncertainty and risk assessment remain challenges of the day.