An M&A Checklist During COVID-19
COVID-19 is so unprecedented that the mere assertion of its unprecedented nature has become a cliché. Businesses face a wide range of challenges, from supporting employees and expanding their business model to just remaining operational. Mergers and acquisitions can give companies significantly more flexibility and security in this uncertain environment. If you’re considering undertaking the M&A process, here’s a checklist of the most important things to consider:
- Adjustments to purchase price: The post-COVID-19 world may be a radically different place. The economy of today is already substantially different from the market of a few months ago. What counts as normalized operations may change. Sellers may need to take dramatic steps to maintain liquidity. Buyers will similarly be focused on ensuring the business they acquire has appropriate levels of working capital. When this is not possible, buyers may demand adjustments to the sale price, or request other changes to deal terms.
- Material adverse effect or material adverse change provisions: MAE and MAC have historically presented very few options for terminating deals in most states. These provisions are designed for unforeseen catastrophes that present long-term, significant valuation effects. COVID-19 seems like an obvious fit, but its specific impact is evolving. Whether it will be considered an MAE will depend both on the language of the clause itself and what each party knew at the time of signing.
- Termination rights and fees: This heavily negotiated deal term demands special attention in the current climate. Parties should be mindful of the outside date termination provision, since government and third-party consents may take more time. To whom does the risk of delay fall, and for how long? How long can you wait between signing and closing, and what degree of shift in the target’s financial status is acceptable? Answering these questions demands expert insight from an M&A advisor.
- Representations and warranties: Due diligence during COVID-19 presents serious challenges. Some information a buyer might otherwise seek—such as a target's experience with similar challenges in the past—is simply unavailable. Projections may be difficult to assess, and site meetings and in-person evaluations may prove impossible. Representations and warranties can inject a little more certainty, providing actionable information in the midst of an unprecedented economic climate.
- Interim operating covenants: Between signing and closing, buyers generally demand that sellers operate as usual to preserve business value. During a global pandemic, this is impossible. Buyers should work with sellers to draft specific language designed to preserve the mission of the business and maintain value to the greatest extent possible.
- Business interruption insurance. If either party hopes to obtain representation and warranty insurance, they must focus on the exclusions and limitations that will apply. Business interruption policies were generally not designed or priced to provide coverage against communicable diseases, such as COVID-19 and therefore typically include exclusions for that risk.
We don’t yet know what the long-term impact of COVID-19 will be. Business owners who are contemplating a sale should seek expert insight. You might be tempted to delay the deal, but there is no evidence that all deals will be more valuable on the other side of this. So work with an experienced investment banking firm who can advise you about what to expect and help you determine the best timing for a sale.
About Madison Street Capital
Madison Street Capital is an international investment banking firm committed to integrity, excellence, leadership and service in delivering corporate financial advisory services to publicly and privately held businesses. Over the years we have helped clients in hundreds of industry verticals reach their goal in a timely manner.
Our experience and understanding in areas of corporate finance and corporate governance is the reason we are a leading provider of financial advisory services, M&A, and valuations. With offices in North America, Asia and Africa, we have adopted a global view that gives equal emphasis to local business relationships and networks.