September Edition 2020

54 Valuation – Given that valuations are typically generated using projected future earnings based on historical financial metrics of a target, it will become increasingly challenging for buyers and sellers to agree on deal pricing. As a target’s current revenues and operations may not be an accurate indicator of its future earnings due to immediate disruptions to its business and market volatility, parties may turn to other methodologies of valuation, such as using an earnout based on future performance over a negotiated period of time or tying performance to an outside benchmark. Purchase Price Adjustments – Purchase price adjustments using measures such as working capital between the signing and closing of a deal will need to be tailored to specific situations. Because a working capital calculation is often based on a historical average of working capital, parties will need to take into account adjustments related to the pandemic, such as delays in collecting accounts receivable and paying accounts payable. There may also be changes in working capital relating to changes in pricing differences if the supply chain changes, or whether a company can achieve a net working capital target due to changed circumstances following the pandemic. Methodologies to determine net working capital for interim operations may need to be adjusted. Obtaining Financing –Due tomarket uncertainty and constraints on a target’s liquidity,lenders are likely tobemoreconservativeandbuyersmay havedifficulty in securing adequate debt financing. When a lender determines whether to provide acquisition financing, it generally does so based on the target’s financial performance, which may have declined significantly in connection with the pandemic. To the bridge the gap created by challenges in obtaining financing, we expect to see the utilization of more seller notes or larger rollovers by sellers. Deal terms will inherently be very fact-specific, but these are critical considerations that should be flagged at the outset of any M&A transaction as potential buyers and sellers evaluate new opportunities post-COVID-19. Due diligence will have an increased importance regarding ongoing and future M&A transactions – owing to substantial disruptions and the expansive nature of COVID-19’s impact on businesses. Specifically, due diligence should be focused in the following areas: Material Contracts - The parties should carefully review a target’s supplier and customer contracts to determine whether the target has breached any material provisions under such contracts in connection with its response to COVID-19. Due Diligence will become ever-more critical