June 1, 2020 HMA Website

The Partner’s Notebook: Tom Marx

I write to you at the end of May 2020 reflecting on the past 90 days and attempting to peer into the future of aftermarket mergers & acquisitions. We are three months into the grips of the pandemic and resulting massive drop in commerce in the world of parts, accessories, and service.  This is a time of transcendental change.

From an M&A perspective, some deals that were well along in the process and supported by confident buyers are still closing. Many deals where financing is required have paused pending some level of confidence of what the post-pandemic marketplace will look like, and what it means for revenue and EBITDA.

The private equity world has largely been focused on triage needed for current portfolio companies and putting cash to use through lending to companies that are having liquidity challenges. Creative financing structures may result in gaining equity (majority or minority) as well as some debt-only financing plus some back-end kicker.

The future?

Three to nine months of financial statements starting June 1 will support a new look at market prices for aftermarket companies. This puts us out to early fall before some level of confidence returns, especially to the banking side of transactions.

At that point, the conflict between putting to work the large amount of “dry powder” (cash–some say $2.8 trillion!) versus a more conservative investment thesis will start to come to a head. Buyers will want concessions in price as well as more back-end compensation structures and more aggressive reps and warranties.  Sellers may be ready to exit but will likely realize the M&A bull market of the past 8-10 years did have an end, likely too late for those that prevaricated and wanted to get the highest possible dollar.

The good news? There will be a lot of opportunity to buy and to sell. Those well-positioned from a cash perspective will find bargains. Owners that really do not want to go through another rebuilding cycle so close on the heels of the previous and recent Great Recession, may find willing buyers. Those that found creative ways to quickly adapt to the pandemic by shifting to manufacturing or selling PPE’s and other in-demand products will see pay-off for their nimbleness and ingenuity.

The ripple effect of the pandemic will impact our world and it will be both challenging and exciting. What appears to be clear to me is that the rapid consolidation of the aftermarket will continue and likely accelerate. Hold onto your hat as we speed into the future.

Wishing you all prosperity and good health through all this.