Recently, we have been advising some clients and potential clients regarding possible acquisition opportunities created by the COVID-19 pandemic. The changing customer base and buying habits are substantially changing numerous industries and are creating opportunities for new businesses and businesses whose owners can rapidly change their business and sales models to operate profitability in today’s new environment.
As a buyer looking to acquire another business or assets of another business, whether through an asset or stock acquisition, here are some key considerations:
- Valuation & Financing:
- Current valuations of a targeted business or its assets are extremely difficult in today’s environment, especially in industries heavily impacted by the shutdowns and changing customer buying habits. Past revenue and expense history may need to be substantially discounted. No one knows how long these changing customer buying habits will last. What are you buying, predominantly assets or a “going concern” with goodwill? Clients should consider moving a portion of the purchase consideration to an earn-out over the next 2-3 years to reduce the risk of over valuations if you are valuing the business as a “going concern” with goodwill.
- Cash is king. We have been told that financing has become difficult to obtain, and deals requiring financing are taking longer to close. Don’t be surprised to find new financing terms and conditions. Financial institutions are evolving to address the new financial risks associated with COVID-19.
- Due diligence:
- Anticipate that the due diligence will take substantially longer to perform. Consider extending these timeframes to obtain better data regarding the impact of COVID-19. Virtual diligence challenges? You should factor in additional time for business targets to respond to diligence inquiries while working remotely or with reduced staff.
- As detailed above, due to forecasting uncertainties, clients will need to perform more investigation of the target business model, current and expected business in their pipelines, stability of supply chains, anticipate increasing costs, remote working capabilities/IT infrastructure, business relationships and short and long term strategies.
- With delayed or reduced diligence available, a buyer may want to consider a due diligence condition “out” where the buyer’s obligation to close depends on the completion of diligence to the buyer’s satisfaction, or certain event triggers.
- Consider payouts and earn outs of the purchase price over time, unless you are intending to substantially change the business model and direction.
- Contemplate additional warranties and representation to address the current and future impact of the outbreak on the target business, its customers and suppliers.
- Make sure that your agreement has a material adverse effect or condition and material change in condition clauses. Boilerplate within the agreement is more important than ever. Ordinary course of business covenants are becoming more scrutinized as ways to back out of deals or negotiate purchase price adjustments.
We would be glad to assist you with your next acquisition, and help you navigate through these difficult waters of purchasing a new or existing business. Please do not hesitate to contact us.