While the use of virtual data rooms as a means of sharing financial projections, material contracts and other documents has long been standard practice, other aspects of due diligence are traditionally conducted in-person, such as management meetings and facility tours. As more businesses are sending employees home and limiting travel in response to COVID-19, these types of in-person events will be increasingly difficult to arrange. Buyers and sellers should consider how best to use videoconferences, online collaboration spaces and other virtual methods to allow due diligence to continue, and, just as importantly, to allow the parties to develop the personal rapport that helps get transactions done. Sellers should also make sure that officers and employees responsible for key functions will be able to participate in the due diligence process even if they are working remotely.
Stress Test Projections.
Financial and operating projections are a key component in analyzing a potential acquisition and structuring material terms, such as purchase price. In light of the rapid changes resulting from the world’s response to COVID-19, it is critical that buyers look beyond the numbers and understand the key assumptions that drive the seller’s projections. Once these key assumptions are understood, the buyer should stress test the projections with a variety of risks in mind, including “worst-case” scenarios involving extended disruptions of supply chains, key customer relationships or other critical components of the seller’s business.
Read the Boilerplate.
Buyers and sellers should each pay greater attention to the details of material contracts that often get overlooked as part of a normal due diligence process. This includes terms of outbound contracts that the seller has with its customers, as well as inbound contracts from key suppliers and vendors. Items to consider include:
Make Sure You’re Covered.
The parties should review the scope and coverage of the seller’s insurance policies, including any applicable business interruption insurance. To the extent that there is potential coverage under the policies for incurred or anticipated losses, the parties should specifically address any insurance recoveries as part of the negotiation of the transaction. The buyer should also ensure that it has adequate coverage available after the acquisition takes place, including any necessary ongoing or tail-coverage under the seller’s policies.
Plan for the Long Term.
There is no way to predict how long the immediate disruptions due to COVID-19 will last, but it seems clear that the effects on businesses and industries will continue long after the spread of COVID-19 has been contained. These potential long-term effects should be considered when structuring forward-looking deal terms, such as earnout provisions, performance-based equity vesting or management bonus plans.
The Coronavirus Task Force at Klehr Harrison stands ready to assist you in your business and legal needs. We will continue to provide additional information and guidance as the COVID-19 situation develops.
Author Matthew M. McDonald is a partner in the Corporate & Securities Department at Klehr Harrison.