Some businesses have boomed as a result of the COVID-19 pandemic; particularly with the change in consumer online purchase habits during the lockdown. However, many businesses haven’t had the same level of success and may have needed to make changes.
Some approaches adopted by businesses have been:
- make use of the Coronavirus Job Retention Scheme (shortly to be replaced by the Job Support Scheme);
- rely on the Coronavirus Business Interruption Loan Scheme;
- make redundancies;
- temporarily shut down; or
- enter into an insolvency process (such as a pre-pack administration or a liquidation).
It’s clear that COVID-19 has really tested business continuity and emergency planning but how has the private M&A sector been impacted?
Deals may have been cancelled, postponed, or impacted due to:
- changes in deal attitudes/risk profiles due to the uncertainty caused by lockdown and associated government measures;
- difficulty in predicting business performance and obtaining a reliable price calculation;
- difficulty in accessing acquisition finance;
- a focus on retaining cash reserves; or
- simply, changes in personal circumstances.
These may have likely been impacted due to:
- a lengthier due diligence process as a result of a difficulty in sellers compiling information remotely and/or sellers having to juggle making key business continuity decisions at the same time as undertaking this process;
- a lack of face-to-face meetings to make key decisions;
- regulatory approval delays; or
- the absence of personnel (whether due to illness, self-isolation, or furlough leave).
Certain areas may have taken on a new significance when investigating target companies, such as:
- the performance of supply contracts or service level agreements and any termination rights and force majeure clauses therein;
- the company’s financial resilience and debt management;
- the company’s compliance with covenants in its finance agreements;
- the company’s business continuity, disaster recovery, and crisis management plans;
- employment issues such as COVID-19 related absences and also changes to employment contracts, homeworking policies, and health and safety procedures;
- cybersecurity and data protection risks and homeworking; and
- insurance policies and, for example, business interruption cover.
Buyers may be:
- Reluctant to accept traditionally “seller-friendly” approaches to valuation such as a locked-box deal.
- More likely to heavily scrutinise the minimum working capital requirements in any completion accounts purchase price adjustment.
- More inclined to offer earn-out payment terms due to the uncertainty over how the target may perform moving forwards but negotiating any such terms are likely to prove challenging in an uncertain market.
- More inclined to offer deferred consideration payment terms to manage cashflow and/or retain a portion of the purchase price against breach of warranty. However, sellers could then be asking for this money to be retained in an escrow account or for security to be given (potentially by the buyer or a parent company) to provide them with comfort over getting paid.
- Where there is to be a gap between exchange and completion, looking to include material adverse change (MAC) clauses as conditions to completion to enable the buyer to withdraw from the deal in such an event. MAC clauses haven’t previously been common in UK private M&A. Such clauses are likely to be heavily negotiated and require precise drafting to avoid costly litigation ensuing if the buyer is wrong in its assessment that such an event has occurred.
- Opting for an alternative approach to a share sale by acquiring part rather than the whole of the share capital upfront, combined with an option to purchase the remainder in the future. This could strike a useful balance between mitigating the buyer’s risk and the seller retaining value. However, key to this will be the terms of the option and the terms of any Shareholders Agreement operable in the interim period.
Specific COVID-19 targeted warranties may be required by buyers in relation to the state of the target’s business, the status of material contracts, changes since the last set of annual accounts or compliance with COVID-19 rules, regulations and requirements. Qualifications to warranties may be required by sellers (in particular in relation to forward-looking warranty statements) and sellers should consider making disclosures in relation to any known COVID-19 related risks or issues.
The value of warranties, however, has to be questioned in the context of a stressed acquisition and buyers may require a proportion of the purchase price to be retained or guarantees to be provided by the sellers.
BHW’s Corporate & Commercial department has extensive experience in dealing with company sales and purchases. For further information please contact 0116 289 7000.