In light of COVID-19, buying and selling a business now looks a little different.
While, earlier in 2020, we saw the number of deals plummet as mergers and acquisitions nearly ground to a halt, we have seen a resurgence of deals in the middle to latter part of 2020. In addition, deal flow is looking better for 2021, now that the impacts of COVID-19 have been absorbed. Given the impacts of COVID-19 on virtually all aspects of life, the buying and selling of businesses now looks a little different. Some common changes to business purchase agreements and current deals have emerged.
Buyers willing to take a chance on business purchases (or who see value in purchasing a business affected by COVID-19) have a keen eye toward sorting the (hopefully) temporary impacts of COVID-19 from general business declines that impact the value of businesses going forward. Buyers look for an absence of change. Changes that garner additional scrutiny in today’s deals include reductions in force, material shutdowns of manufacturing or materials unavailability, tax extensions that may increase future tax liabilities post-closing, and temporary reductions of management salary that may lessen the appearance of economic impact on a company. In these regards, COVID-19 buyers need to be sure not to lower the level of diligence conducted during even mutual deals. In fact, we have seen heightened diligence in the COVID-19 era.
Carefully scrutinizing cash flow impacts for false elevations brought about by temporary cost-cutting or the infusion of stimulus money is critical. It is also crucial for buyers to obtain updated cash flow statements to reveal late business impacts of the pandemic that may only be revealed on the eve of closing.
CARES Act Impacts
The CARES Act has had its fair share of direct deal impacts, the most significant of which has been the recent difficulties surrounding the timing of obtaining either Payroll Protection Program (PPP) loan forgiveness or applying for forgiveness and obtaining the requisite consents to close. Even in cases of forgiveness application (where forgiveness is imminent but not yet obtained), absent an escrow, closing can be delayed while the SBA loan remains outstanding.
As a result, additional escrows have appeared in COVID-19 deals. Some escrows are bank mandated like the escrows required to close a deal with a PPP loan that has not been repaid or forgiven. To account for economic uncertainties, sellers may also see additional escrow as increased holdbacks for true-ups or, as we typically see, to secure indemnification obligations.
CARES Act tax law changes, and how those are treated by target companies, also potentially impact deals. Uncertainty regarding deductions can impact deal value as tax liabilities are potentially increased. We recommend our buyers consider the anticipated treatment of tax liabilities by target companies.
Impacts on Deal Language
Deal language certainly has been impacted by COVID-19. The insertion of materiality and knowledge qualifiers has increased dramatically, and negotiations over these terms has become more focused. COVID-19 carveouts to Material Adverse Effect language are commonplace, and negotiations over the inclusion or exclusion of COVID-19 from existing Force Majeure contracts may also impact deals. Sellers will need to disclose material pandemic impacts on underlying business contracts and any non-performance rights brought about by COVID-19 in underlying business contracts should be disclosed.
We expect some of these changes to survive the pandemic and become permanent deal fixtures. Others will sunset as EIDL and PPP loans are paid back or forgiven. The good news is that the pandemic has created additional opportunities for both buyers and sellers. It is still possible to buy and sell businesses to preserve the jobs of American workers at a critical time. Entrepreneurs always find a way with some even able to capitalize on the pandemic in late year deals given some of the values out there for potential buyers.
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Pittsburgh Corporate Attorneys
Attorneys Jacquelyn Core and Michael T. Voytek are experienced members of The Lynch Law Group’s Corporate Practice – focused on representing small, medium, and large enterprises in complex commercial transactions, including mergers and acquisitions. Jacquelyn and Michael are available for consultations to structure, negotiate, and close deals in the COVID-19 environment and beyond. Please call (724) 776-8000 or email the attorneys directly at email@example.com and firstname.lastname@example.org to schedule a time to discuss your deal.