- Successful M&A during the COVID-19 outbreak: seven things to consider
Successful M&A during the COVID-19 outbreak: seven things to consider
Successful M&A during the COVID-19 outbreak: seven things to consider27th April 2020 - Published by Kuits corporate team
COVID-19 brings new challenges for buyers and sellers involved in M&A transactions with both, understandably, wanting to negotiate protections into the deal structure to insulate them from the risks of the uncertain landscape.
In any M&A deal, sellers need to be comfortable they can sell the business in accordance with the warranties, indemnities and undertakings they are required to give in the sale agreement, while buyers will want to make sure they are acquiring the right business for the right price. COVID-19 is complicating this in the following key ways:
1. Funding of an M&A deal
Uncertainty makes it tougher to obtain funding. Sellers should now, more than ever, at the outset clarify with the buyer how it is funding the deal and, if external funding is being advanced, should confirm there is a legally binding offer in place and when it expires.
2. Timing of an M&A deal
Parties are naturally considering whether now is the right time to conclude a transaction whilst managing professional costs until uncertainties (such as those surrounding the continued availability of funding or the target’s trading position and prospects) can be clarified. Transactions in the current climate will therefore be more staged and take longer.
3. Price of an acquisition
In light of uncertain future financial performance, the buyer may re-open price discussions, for example:
- Revisiting the overall price;
- Structuring it based on post-completion price adjustment via completion accounts (which take into account financial performance up to completion), even if the original plan was a locked box based on historic accounts;
- Including earn-outs, whereby part of the price is dependent on financial performance after completion. For both parties, the period over which the earn-out is calculated, the applicable financial targets and protections afforded during the earn-out period will be impacted by COVID-19 considerations; or
- Deferring a proportion of the price and increased use of deferred consideration as retention from which claims against the sellers can be satisfied by the buyer.
4. Due diligence on an M&A deal:
Buyers will be focusing due diligence on areas where the impact of COVID-19 is strongly felt, such as employees, contractual terms of leases or with lenders, key customers and suppliers (including force majeure and material adverse change clauses), IT systems, health and safety, and insurance. Sellers will need to demonstrate their strategy for mitigating the effects of COVID-19.
5. Warranties and indemnities
Risk apportionment in sale agreements is always negotiated. Buyers may now seek specific warranties and indemnities relating to the COVID-19 impact on the business, whilst sellers will want to ensure warranties relating to COVID-19 are qualified by awareness and materiality, and are sufficiently disclosed against to protect from claims.
6. W&I insurance
When considering warranty and indemnity insurance to provide the parties comfort on COVID-19 related deal risks, careful attention should be paid to the small print of the policy – it is likely COVID-19 related claims will not be covered.
7. Gap between exchange and completion of an M&A deal
Where there will be a gap between exchange and completion:
- Long stop dates: the long stop date (after which the sale agreement is terminated) must allow sufficient time for satisfaction of the conditions, bearing in mind regulatory approvals or requests for consents from customers/suppliers may take longer to be provided.
- Material adverse change: a material adverse change (MAC) clause in the sale agreement, giving the buyer the right to terminate if the target is materially and adversely affected by events between exchange and completion, will typically exclude general market risks such as a global pandemic. Buyers may therefore seek to specifically include impacts of COVID-19. A MAC clause is likely to be heavily negotiated by the parties.
- Operating the business: the seller’s obligation to operate the business in the usual way and restrictions on what the seller can do following exchange may need to include exceptions reflecting what will actually be required; for example, possible furloughing of staff or changing working and trading practices without needing the buyer’s approval.
- Repetition of the seller’s warranties at completion: the consequences of a breach of warranty following exchange but before completion (including whether the buyer can walk away and on what terms) will likely be even more heavily negotiated in light of COVID-19 creating so much uncertainty about what could happen following exchange.
Overall, M&A transactions are likely to move at a slower pace and throw up some curve balls along the way during these unusual times, but by engaging experienced advisers who can guide businesses through the minefield caused by COVID-19, transactions can still be brought to a successful conclusion.
For necessary advice and assistance, please contact partner Kirsti Pinnell in our experienced corporate team on 0161 838 7847 or at firstname.lastname@example.org.