- Alternative transaction structures in light of COVID-19
Alternative transaction structures in light of COVID-19
Alternative transaction structures in light of COVID-1911th December 2020 - Published by Kuits corporate team
The COVID-19 pandemic has put significant strain on many UK businesses; unfortunately, this difficult situation looks set to continue, with the British Chambers of Commerce recently warning that “the situation for business grows graver by the day”.
Opportunities for investment
As we saw during the last recession in 2008, times of economic uncertainty can also create opportunities for the savvy investor. Sellers of some struggling businesses will inevitably entertain lower offers and if investors are able to successfully identify and address the reasons for the target’s distress, and perhaps be prepared to weather the COVID-19 storm through capital investment, there are opportunities for significant returns in the long-term. It is therefore important that those looking to invest are able to mitigate the risks that the uncertainty of the current global economic climate presents, and balance their desire to obtain a bargain with the risks inherent to acquiring a business in distress.
Equally, there are opportunities out there for owners of businesses which may not, in this climate, entail the traditional trade sale of the entire share capital of the company that they may have anticipated pre-COVID, but could still unlock value and achieve their long term objectives in a different way.
It is worth investors and business owners considering different structural approaches to transactions such as:
1. Alternative forms of capital – Rather than acquiring shares in a business, an investor could instead advance traditional debt or obtain convertible loan notes, preference shares or other instruments or securities some of which confer an option for the investor to acquire shares at a future stage.
Convertible loan notes in particular have the benefit of being often quicker to negotiate than a straight equity investment meaning the business can receive the cash injection much faster than otherwise might be the case. Furthermore, as a result of their status as a debt prior to conversion, they confer on their holder’s priority over shareholders on liquidation. This means that investors have a better chance of recovering their investment in the event of insolvency.
2. Only acquiring a stake in the target – Acquiring a majority or minority shareholding with a contractual option to increase the stake in the future can be a safer alternative to acquiring the entire share capital of a business outright in these uncertain times.
This approach has the added benefit of facilitating a smoother handover in management, with the seller still being involved in the running of the business and, crucially, still having an interest in the performance of the business. The option price is usually based on actual financial performance, which mitigates the risks of uncertainty in the valuation for the investor whilst allowing the seller to continue to share in its success.
3. Joint ventures and partnerships – Partnering up with others enables the potential exposure for investors in businesses with uncertain prospects and unclear valuations to be shared, whilst ideally having the added benefit of a wider pool of expertise to help steer businesses through the current storm and out of any financial distress.
4. Asset sales – When purchasing the entire share capital of a company, a buyer will acquire the business with all of its liabilities and obligations, including those unprecedented issues that businesses are grappling with due to the pandemic and which buyers may struggle to adequately assess in order to ensure the terms of the deal protect them sufficiently. An asset purchase will instead enable the buyer to largely choose which assets and liabilities it acquires and this is likely to be extremely attractive to buyers in the current climate. There are various differences between an asset sale and a share sale and we would be happy to discuss with potential buyers or sellers whether a share sale or asset sale is most suitable for them in the circumstances.
Get in touch with a corporate solicitor in Manchester
If you would like to discuss any of these approaches with a corporate legal expert, then please do not hesitate to contact Senior Associate, Helen Mather on 0161 838 8183 or email firstname.lastname@example.org.