In our previous article, we gave some thought as to how Covid-19 will affect the M&A market.
One of the issues raised was that factors caused by Covid-19 may cause buyers to push for more favourable deal terms. There is a great deal of uncertainty around how the economy will be brought back to life and how businesses will perform in that new environment. For example, some observers are talking about ‘every business being a start-up now’ due to the upheavals and changes to business operation caused by Covid-19. Some buyers will therefore be looking for deal terms that will give them some protection against this uncertainty whilst others may simply be opportunistic.
In this article we’ll look in more detail at some of these terms.
It is fair to say that Buyers will justifiably give greater consideration to variables/risks that didn’t seem so relevant before the outbreak of Covid-19, for example:
These concerns will cause buyers to look harder at how they may protect themselves from perceived risks.
Buyers may ask for split exchange and completion with the inclusion of a Material Adverse Change (MAC) clause. A MAC clause will allow the buyer to withdraw from the transaction or renegotiate on price prior to completion if there has been a material adverse change affecting the business.
MAC clauses generally exclude macroeconomic events which affect the market generally so would normally not apply to risks such as Covid-19. However, buyers may now be pushing for clauses which cover further outbreaks or other specific events.
MACs should generally be resisted by sellers. If buyers are insistent, the MAC’s scope should be narrowed - covering further virus outbreaks should, for example, be resisted. This would be on the basis that it is reasonably foreseeable that a further outbreak may occur and that it has already been factored into the business’s operation (via well executed disaster recovery plans) and also factored into the pricing and/or deal structure.
The buyer may try and renegotiate the purchase price and/or not pay all consideration up-front. Deferred consideration and earn-out clauses allow a buyer to pay elements of the purchase price after completion and such payments may be tied to actual performance of the business.
Deferred consideration will reduce the buyer's immediate need for cash to finance the deal and give the buyer an opportunity to withhold money owed to the Seller in connection with any potential warranty or indemnity claims. Even where such claims are somewhat less than clear the ability to withhold payment gives a greater likelihood of a negotiated settlement and a saving for the buyer. Risks and difficulties faced when trying to recover monies from sellers for breach of warranty or indemnity are much reduced. The Sellers should therefore:
These are future payments of consideration that are only payable if the business performs to specific requirements agreed by the buyer and seller. The following issues should be taken into account when negotiating such clauses:
Sellers should ensure that you are as ready for a transaction as you can be, undertake your vendor due diligence exercise well in advance to give yourself the best chance to pre-empt any concerns a buyer may have and provide solutions. In the current environment, have your ‘Covid-19 story’ ready - how have you dealt with the crisis, how have you adapted, how are you planning for the future - evidence of how you have dealt with the situation may allay a buyer’s fears. Good preparation is key to heading off awkward negotiations and/or limiting the justification for less attractive payment terms.
Sellers should also consider the financial credibility of the buyer and its vulnerabilities to a further virus outbreak - a deferred payment is a payment at risk and so sellers should consider whether security or a guarantee can be given or whether funds can be placed in escrow.
Buyers should rightly look to protect themselves from specific and genuine concerns - opportunistic or very general coverage should be resisted.
If you would like more advice on this topic, please email Jason.email@example.com.