COVID-19: M&A Due Diligence Considerations

In any mergers and acquisitions (M&A) transaction, a Buyer will engage in some degree of due diligence on a target company to gain a further understanding of any legal, operational, or other risks before entering into a deal. As with any due diligence investigation, Buyer’s should tailor their due diligence process to a target company. However, in the coming days and months, Buyers will want to particularly investigate the potential impact the COVID-19 pandemic may have had or will have on a target company. Below are a few areas Buyers may want to pay specific attention to moving forward:

Compliance:

Buyers should carefully review the potential federal, state, and local laws, regulations, and guidelines that may impact the target company. This may include stay-at-home requirements, employee testing, social distancing. Along with understanding how regulations or guidelines may impact the future of the target company’s business, Buyers should review whether the target company has been in compliance with the regulations and orders prior to acquisition and whether non-compliance will result in further costs and expense down the road.

Supply Chains:

As any business that sources materials for its business is keenly aware, supply chains have been significant impacted by the current pandemic. However, the degree of this impact can vary dramatically from industry to industry and location to location. Buyers should make the effort to understand a target company’s dependence on certain suppliers, with particular attention paid to the location of such suppliers. Additionally, Buyers should understand that landscape for alternative suppliers along with currently projected inventory levels and forecasts of a target company.

Real Property:

A major component of many M&A transactions is the real property situation of the target company. The commercial real estate world is likely to undergo a significant transformation as a result of the work from home policies that have spread across the country. Buyers should pay particular attention to whether workplace restrictions present opportunities or issues under real property leases or similar agreements, including whether there are any pertinent termination clauses that would allow the target company to give back space.

Employees:

A company’s payroll is oftentimes a company’s most significant expense. In the wake of COVID-19, many businesses have had to take a hard look at their payroll and, in some cases, make difficult personnel-related decisions. Buyers should take the time to review a company’s response over the past several months, including measures taken to promote safety of its employees and whether there was a large fluctuation of employee level during the crisis. This may be particularly relevant when determining the company’s ability to rehire or retain employees that may have been laid-off or furloughed when operations resume.

Debt Obligations:

Buyers should pay close attention to whether there have been any defaults, waivers, amendments, etc. to a target company’s debt obligations. If there have been, analysis of the terms and the target company’s ability to pay its debt obligations (restructured or otherwise) will be essential. Buyers should also consider and question whether the target company has been able to comply with its representations, warranties, and covenants related to any debt facility. Additionally, Buyers should determine whether a target company has taken on assistance from the CAREs Act and, if so, whether the target company has remained compliant with the terms under the Act.

This is not all-encompassing list of factors to consider in M&A transactions moving forward. Buyers would be well-advised to take the extra time necessary to analyze the novel impacts of COVID-19 on a target business.

 

Alex Monahan is an associate at Lippitt O’Keefe, PLLC. He focuses his practice on business and corporate law, real estate law and commercial litigation. Contact Alex at amonahan@lippittokeefe.com