The COVID-19 pandemic has had an impact on many businesses and their operations, especially within the realm of mergers and acquisitions. When engaging in a merger or acquisition during the pandemic it is important to understand certain unique issues that may affect the transaction. We hope this ‘Resnick Law Monthly Tip’ will help to better prepare business owners, individuals, and investors within today’s unique landscape.
Greater Discrepancies with Purchase Price
The pandemic has brought into question the long-term viability of many businesses; in turn, this tends to create discrepancies in purchase price and business valuations between buyers and sellers. Many business models are being scrutinized beyond normal due diligence, and sellers during the pandemic are increasingly expected to demonstrate the impact (albeit largely unknown) that the pandemic will have on a company’s long-term economic health. Discrepancies in valuation may result in more substantial purchase price adjustments.
A buyer’s motivation for acquiring a business may also influence the purchase price. While buyers interested in financial gain will likely be focused more on short-term profits, others may be more focused on strategic plays and growth potential. It goes without saying that the type of business plays a large role in all of this. Additionally, in today’s economy there is still much uncertainty regarding survival and what the world looks like post-pandemic. All of these factors can greatly impact the purchase price of a transaction.
Working Capital Adjustments
The way in which many businesses operate has changed substantially during the pandemic. Additionally, many businesses have been forced to pivot and/or adapt their operations to account for less working capital and cash flow. One common area of contention within mergers and acquisitions right now is whether working capital should be measured against standards that existed before the pandemic, or if projections should be based on the current economy. Buyers will favor projections based on the current economy, as this will likely justify a lower purchase price, while sellers will tend to favor projections based on numbers and valuations pre-pandemic.
Anticipated Timelines Have Increased Greatly
The day-to-day operations of many businesses have been significantly disrupted and impacted as a result of the Coronavirus. Understandably, some companies have implemented remote-work policies in the hopes of keeping workers safe and healthy. Despite these efforts, however, the time frame for merger and acquisition transactions may inevitably take longer, as the flow of information is not as fluid as it once was. Also, performing physical and internal inspections has become more difficult, dictating longer periods to be needed for due diligence. For several reasons, the parties to a merger or acquisition can expect the entire transaction to take a longer period of time from beginning to end than they once did.
Signed into law on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act is a $2 trillion spending package that contains various types of pandemic-associated relief, including direct payments to individuals as well as small business loans. Many of these changes impact tax returns for previous years as well as for the 2020 tax year. The changes and issues that have arisen may also have a substantial impact on determining valuations of companies and their assets.
Speak With a Knowledgeable Corporate Law Attorney
If you are interested in discussing a potential merger or acquisition, one of the best things that you can do is retain the assistance of an experienced attorney. Contact Resnick Law PC today to schedule a free consultation.