In a recent article published by Corporate Board Member, Andrew Lohmann and Lisa Hedrick discuss the current landscape of mergers and acquisitions as the economy recoils from COVID-19. Though transactions have dropped significantly since the beginning of the year, Lohmann and Hedrick offer strategies and considerations for businesses moving forward with deals now and into the future.
One issue to consider is the impact of PPP loans taken by sellers. Hedrick suggests large acquirers and PE firms can be hesitant to close deals with businesses that received PPP loans out of concerns for negative press and the need for more guidance from the SBA regarding what happens if a seller closes a deal in the middle of its loan period or while asking for forgiveness. Still, sellers shouldn't rush to pay back PPP funding early and should instead plan to return funds at closing - just in case the deal falls through.
"You can always try to negotiate a way to handle different scenarios in the definitive purchase agreement itself and still get the deal done," says Lohmann. "We have advised boards and stockholders of target companies that have received PPP loans, particularly in an equity sale context, to definitely not let a buyer wait until actual approval of forgiveness has been received -- but to try to get the deal closed as soon as the eight-week period is over. And if there's any concern about risk over the final calculation of forgiveness, that's risk allocation that you can handle in a purchase agreement."
Lohmann also predicts that there will be an increase in earnouts that resume or arise after the economy starts to recover. "Anytime there's uncertainty on valuation, you're going to see more conditions for contingent purchase price tools like an earnout," he said.
As for buyers, they will need to account for many new due diligence considerations, including whether the target had workplace issues, employees who were infected, shutdowns unrelated to the shelter-in-place orders, layoffs with severance, WARN Act violations, compliance with relief legislation and updated employment and tax laws.
Hedrick suggests there will be a wave of distressed M&A to follow as companies spinoff divisions that are underperforming to bolster their overall strength. "What I'd invite companies to start thinking about strategically: where can they shore up some of their performance or spin off aspects that aren't performing as well to help kind of build that better company," she said. "Do everything you can to mind your current business and make sure everything is in order, that you're complying with all the new laws; that if you have soft spots in your performance that you can figure out ways to bolster." Changes could include pivoting or rescaling operations.
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Kristen M. Chatterton