As we move out of lockdown and back out into the world, thoughts are increasingly turning to the acquisition opportunities available for those with access to cash. So what should buyers be thinking about when putting their deals together in the post COVID-19 world?
At the start of the process comes due diligence. In addition to all the usual questions, buyers need to factor in the pandemic and think carefully about what additional questions they should be asking, for example:
- Material contracts – are key customers or suppliers able to terminate due to COVID-19? Can both parties still comply with the terms of the contracts? What is the risk of litigation relating to these contracts?
- Solvency – is the target solvent and is it likely to remain so? Has the target had any emergency government funding and if so, how has that impacted projections going forwards.
- Compliance – has the target complied properly with furlough requirements and taken all required steps to ensure the safety of its employees and customers?
- Supply chain – where are suppliers located and will that impact on ability to continue to supply?
If there is indeed a deal to be done, buyers then need to think about how best to protect themselves. Ways of doing this include:
- Purchase price adjustments – a mechanism that gives proper protection and certainty for both sides will be essential to getting a deal done. Buyers should protect themselves by using completion accounts, deferred consideration and earn-outs.
- Buying less than 100% of a target – could you buy some now and some later and reduce exposure? What risks would that bring?
- Preference or convertible shares – instead of buying could you invest in a separate class of shares in the target giving you fixed rights and returns rather than doing a full acquisition?
- Termination rights – buyers should look for conditionality and termination rights where a deal requires any sort of third party consent that is not available at completion. Buyers should ask for a material adverse change (MAC) clause to allow them to walk away if things deteriorate in the gap between signing and completion.
- Warranties – buyers should make sure they have specific warranties relating to COVID-19 and also need to remember warranties usually relate to past performance only. Cover for future changes to the business due to COVID-19 will need to be by way of indemnities, deferred consideration or earn-out.
- Standard provisions – even standard clauses like notice provisions will need to be thought about to check that they work in this new world – for example notice by email is now preferable to notice by post.
As with the last financial crash, as things ease there will be good deals to be done for those who are prepared to take risks. If you would like to discuss how we can help, please contact our Corporate Team.