Posts made in May 2020

Businesses valued with new COVID-19 metrics

The Denver Post | BUSINESS

BY GARY MILLER | GEM Strategy Management, Inc.

PUBLISHED  Sunday, May 31, 2020,  at 6:00 a.m.

Unquestionably, COVID-19 pandemic has negatively affected all aspects of our lives. In the business community, revenues, earnings,  and valuations have plummeted affecting governments, most businesses,  and individuals alike. As both public and privately held companies search for additional debt capacity and/or potential buyers, the COVID-19 pandemic has and is affecting debt terms and availability, company valuations, and purchase prices paid for companies.
As a result of this current environment, a new financial metric for measuring financial performance has been created. It is called EBITDAC (Earnings Before Interest, Taxes, Depreciation, Amortization, Coronavirus/Covid-19) or Adjusted EBITDA. Companies have always tried to flatter their financial performance and earnings by using various accounting treatments. So, creating a new financial performance metric, EBITDAC, is no surprise. Currently, a great deal of discussion and controversy among the largest investment banks, accounting firms,  and financial centers is being debated as to whether this new, non-GAAP (Generally Accepted Accounting Principles) metric is appropriate during this pandemic crisis.

EBITDA discussion

For privately held business owners seeking to sell their companies for the most profit, it is critical that they understand the accounting principle EBITDA. EBITDA is what some advisors call a pure measure of operating profits. Investors looking to invest/or purchase a company, analyze and compare one company’s EBITDA to another. The higher a company’s EBITDA, the higher the valuation of the company.

The EBITDA formula is simple. Start with the net income number, found on the Income Statement, and add to it interest expenses, taxes (federal and state income taxes only), depreciation, and amortization. These add-backs increase the profitability of the company’s operating performance. EBITDA levels the playing field when comparing companies because various companies will have more or less in interest expense, depending on their debt levels. The same is true for taxes, depreciation,  and amortization since taxes vary substantially from one state to another,  and depreciation and amortization schedules vary as well, depending on a company’s capital purchases. Therefore, earnings can be distorted from one company to another if the EBITDA formula is not applied correctly. It is important to remember that interest, taxes, depreciation, and amortization are true operating expenses for any company.

Adjusted EBITDA discussion

Most company owners that are planning to sell their businesses should engage a professional M&A firm or an M&A consultant to help them recast their past five years of P&L statements, balance sheets, and three to five years of proforma statements. This step is taken to provide potential buyers with both the synergies and potential future earnings of the company. Adding back any one-time-only expenses, extraordinary expenses or personal expenses paid by the company that is tangential to the company’s operations will certainly add to the profitability of the company and to its valuation. Some examples of add-backs include:
• Business disruption losses beyond your control (fire, floods, earthquakes, tornadoes, and tsunamis);
• Extraordinary legal expenses due to a lawsuit;
• Cars, boats, planes expensed through the business for personal use;
• Memberships to country and yacht clubs and gyms for personal use;
• Equipment replacement, repairs, and renovations;
• Owner’s compensation or compensation to family members above market rates;
• Payroll expensed through the company for inactive employees or children;
• Travel vacations for you and your family that are not related to the business;
• Losses due to employee embezzlement; and,
• Payroll expenses including healthcare, life insurance, and retirement for the owners.
These add-backs are added to the EBITDA calculations and are labeled Adjusted EBITDA.

EBITDAC discussion

Certainly, the current pandemic situation can be considered a business disruption, since most small and large businesses were near a total shut down ordered by the government. A strong argument can be made that significant profit losses would not have occurred had it not been for the pandemic shutdown. The key is to precisely identify earnings’ losses that can be directly attributed to the pandemic that would not have occurred had the pandemic not struck. Such examples include, among others;
• Supply chain interruptions;
• Employee retention;
• Loss of customer purchases that can be authenticated from past purchase behavior; and,
• Loss of customer traffic due to “stay at home” orders.

When examining the addition of “C=coronavirus to EBITDA, the earnings of the company could be significantly increased. Remember, those companies that are reporting EBITDAC are adding back “supposed” or “estimated” earnings that never happened. And, at best, the earnings add-backs are anyone’s estimates as to what they could have been. For example, this month Schenk Process, a German measuring instrument manufacturer owned by Blackstone, used this new performance metric, EBITDAC, in its first-quarter 2020 quarterly report, (the C is for coronavirus). According to Covenant Review, a financial research firm, The Azek Company, a Chicago-based manufacturer of building products, raised $325m of junk bonds two weeks ago. It used the term that would allow it to add back “lost earnings” as a result of Covid-19. That was a first for the corporate debt market.

The problem is, how does anyone know what the true earnings might have been if COVID-19 had not come about. By contrast, using the EBITDA formula without the “C”, adds back expenses that really took place. There are no estimates or guesses. The added back expenses are taken directly from the company’s income statement for a specific reporting period.


While many businesses will never recover, many will; therefore, they will look to justify earning losses due to the effects of COVID-19 when trying to sell their companies. Whether they add the “C” to EBITDA or the “C” to the Adjusted EBITDA, it is critical that business owners gather data and documentation that will strongly support this controversial accounting metric to persuade buyers that their company’s pre-pandemic valuation is the same as it will be post-pandemic.

Gary Miller is CEO of GEM Strategy Management, Inc., an M&A consulting firm that advises small and medium-sized businesses throughout the U.S. He represents business owners throughout the transaction process from preparing them to go to market, selling their companies, acquiring companies and raising capital. He has been a frequent keynote speaker at conferences and workshops on mergers and acquisitions. Reach Gary at 303.409.7740 or

What’s the impact of the Coronavirus on M&A for small businesses?

The Denver Post  | BUSINESS

By GARY MILLER | GEM Strategy Management

PUBLISHED  Sunday, April 26, 2020 at 6:00 a.m.

Without a doubt the coronavirus is having a significant impact on M&A transactions. Hundreds of thousands of business have closed or significantly cut back on their business operations; millions have been laid off or furloughed; consumer spending has plummeted; supply chains are disrupted; and oil prices are bouncing around at all-time lows since World War II.

At the very least, many deals are being put on hold, acquisition plans are being cut back, and some buyers are walking away from the closing table. Buyers are forced to examine their own companies as they struggle to minimize losses and pay, furlough, or lay off workers. According to Forbes, Xerox walked away from a $35 billion bid of HP this month stating “. . . it [Xerox] needs to focus on the impact of the coronavirus outbreak on its business”. Other examples that Forbes noted was SoftBank terminating its $3 billion deal with WeWork and Hexcel and Woodward calling off their “merger of equals” as a result of the pandemic.

In addition to the widespread lock-downs and shelter-in-place orders, preventing/limiting face-to-face contact, all are contributing to the slowing of M&A activity. For example, due diligence and the manner in which it is conducted is limited since face-to-face interactions are almost always required. Negotiations are strained when the deal team is working remotely. Debt financing is questionable in volatile markets. Securing approvals from regulators and third-party consents are slow.

According to Dealogic, “The value of M&A activity in the first quarter was significantly lower than the last quarter of 2019, down 35% globally and 39% in the U.S.” Investment bankers have concluded “. . . that most all sell-side engagements are being put on hold until things stabilize”.

What small businesses should expect going forward if they expect to sell their businesses or raise capital

  1. Deals currently in the pipeline and deals entered into during the coronavirus pandemic will move more slowly than during pre-pandemic times. Everything will take longer including initial discussions, letters of intent, due diligence, and negotiations of the definitive agreement. One factor affecting the extended period for closing a transaction is simply the lack of face-to-face meetings which is all but prohibited now. In this environment, new issues of risk management arise from buyers who will want to shift more risk to sellers.


  1. Valuations of businesses, in certain industries, will be driven down significantly as buyers fear that previous valuations may no longer apply. Public stock market valuations since February 2020 are good examples. Understandings between buyers and sellers about conditions to “walk away” from a deal as a result of future value creation will be more frequent. Prior to the pandemic, almost all transactions were paid in cash or cash and stock. In this environment, sellers should be prepared to negotiate payments in stock only, earnouts and/or milestone payment structures if the sellers’ companies have been adversely affected by the pandemic. Often, these kinds of structures bring buyers and sellers together, particularly when the parties cannot agree on the valuation of the company.


  1. Debt financing required by purchasers for funding acquisitions will be harder to find, resulting in delays due to the unstable debt markets and lack of liquidity. In addition, lenders’ closing conditions will be more stringent, affecting both buyers and sellers.


  1. Letters of Intent, term sheets, memoranda of understanding (which are non-binding for the most part) will either expand to nail down more specific deal terms or address only the price and little else.


Proformas will be examined closely and will be heavily discounted as buyers tiptoe into uncharted waters in the future. Buyers will spend more time in initial discussions with sellers before spending money to conduct comprehensive due diligence reviews and analyses. Sellers should expect more attention being paid to the effects of the coronavirus on the buyer’s business going forward. Sellers, on the other hand, should push hard to limit the time period of the due diligence process to as short a period as possible.


  1. Exclusivity periods (preventing sellers from soliciting other offers during the due diligence process) will be longer than the normal 30-45 days, as buyers will insist that they need more time, 60-75 days, to examine potential pandemic issues. On the other hand, sellers should seek provisions terminating buyer’s exclusivities if they see that buyers are unwilling to proceed with the transaction as set forth in the letter of intent.


  1. Negotiations of the definitive agreement will include provisions focusing on changes in the business operations of the seller’s company – referred to as a “Material Adverse Effect” (“MAE”). These provisions affect the closing conditions of the transaction. It permits the buyer to walk away from the deal if the seller has suffered a MAE during the period from the signing date of the definitive agreement through the closing date of the transaction. Sellers should be careful about MAE clauses. They should negotiate “carve outs” that buyers and sellers agree to, in advance, that will not constitute a MAE. Sellers should seek expert legal advice from a transaction law firm that protects them, as much as possible, from MAE provisions.


Is there any good news during the current pandemic environment?

Yes. Many buyers are cash rich (dry powder) and are hunting for well-run companies at the right price. Dealmaking going forward will favor buyers vs. sellers as it did during the Great Recession. Buyers are taking time to search for the best opportunities. Some industries have benefited from the pandemic while others have suffered significantly. Industries benefiting from the pandemic include biotech, food delivery, online shopping, cloud computing, software, videoconferencing and other technologies.

By contrast, retail, hospitality, travel, hotels, restaurants, automobile, and airlines have been and will be impacted the most dramatically.


Business owners planning to sell their businesses or raise capital should realize that their options have changed significantly. Whether selling companies or raising capital, owners should take extra care to prepare their businesses for sale. Keeping key employees is mandatory as buyers will put extra emphasis on the bench strength of the business. Individual and collective incentive retention plans for your most valuable employees should be created.

In a world where physical contact is next to impossible, transactions are handicapped to say the least, so sellers should think through, with their advisors, how best to navigate and communicate in a digital environment vs. a face-to-face environment.

Deals are being completed in this environment; so be patient, prepare well for video conferences. Consider choices of background, lighting and clothing for the best impression. Be careful about exposing your non-verbal facial reactions when you are on a video conference call. Finally, if you are unsure of your proportioned response to an issue that could be contentious, ask for additional time to consider a thoughtful response. Handle to the new realities with confidence and optimism! Your positive attitude will instill trust during a time when many are feeling uncertainty.

Gary Miller is CEO of GEM Strategy Management, Inc., a M&A consulting firm that advises small and medium sized businesses throughout the U.S. He represents business owners throughout the transaction process from preparing them to go to market, selling their companies, acquiring companies and raising capital. He has been a frequent keynote speaker at conferences and workshops on mergers and acquisitions. Reach Gary at 303.409.7740 or