11 factors for dealmakers to consider before buying a company during the pandemic
As transactions previously delayed due to the pandemic begin to pick up, acquirors and investors in the middle market should evaluate the target’s performance during the unprecedented disruption presented by the pandemic, and adjust expectations for the immediate and medium term. Supplemental due diligence is not only prudent -- it is likely to be required as a condition to the placement of any representations and warranties insurance.
Essential considerations include whether the target has been able to innovate and whether the valuation agreed to in a letter of intent should be revisited. Buyers should also review any termination provisions to determine whether any breakup fee would be payable. If a purchase agreement has already been signed, parties should understand to what extent the agreement includes a “no material adverse change” closing condition, and evaluate liability for failure to close.
Supplemental due diligence requests should focus on any material changes to the company’s performance in 2020 as well as the durability of its supply chain, customer demand, customer concentration and solvency, business interruption insurance coverage, government assistance, and personnel issues including health and safety protocols and furloughs and layoffs. A buyer may reasonably request an extension of any exclusivity period in the letter of intent while digesting new information.
The following topics and questions may serve as drivers for internal analysis and supplemental due diligence efforts: