Editor’s note: This is a preview of an article written by Michael J. Zussman and Jacob G. Shulman in the August 2021 edition of New Jersey Lawyer on venture capital and private equity. To read the full article, click here (login required). New Jersey Lawyer features articles and legal analysis written by New Jersey State Bar Association members. For more information on how to submit an article, click here (login required).
History will remember 2020 as the year the coronavirus wreaked havoc across the world. Despite a brief pause at the outset of the COVID-19 pandemic, middle-market companies and advisers adapted quickly and had a remarkable year engaged in mergers and acquisitions (M&A) transactions. While to some extent the transactions represented “business as usual,” COVID-19 impacted all aspects of M&A transactions.
Valuation methodologies of target companies changed to discount for declines in business and allocation of risk, among other changes. The industry coined the new financial metric “EBITDA+C” (earnings before interest, taxes, depreciation, amortization and coronavirus), and buyers expanded due diligence requests relating to employment and benefits and COVID-19 compliance and required additional post-closing escrows.
Banks, landlords, vendors, and customers experienced their own impact from COVID-19, compounding delays and transaction complexities. The United States Small Business Administration and U.S. Department of the Treasury published and continually updated their guidance and rules related to the Family First Coronavirus Response Act, as amended by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the Paycheck Protection Program codified in 15 U.S.C. 636(a)(36) (PPP), the Consolidated Appropriations Act, 2021, and other relevant government acts.
New Jersey Lawyer article explains how companies changed their M&A plans
Many COVID-19 affected companies found themselves changing their M&A plans— seeking alternatives to traditional M&A, adding additional liquidity to bolster balance sheets, pausing or abandoning transactions, or changing sector focus. COVID-19’s impact on a company’s operations and financial health ultimately must be resolved in the transaction documents.
As with all deal terms, buyers and sellers will negotiate each obligation and liability relating to COVID-19. Purchase agreements must address the status and disposition of PPP loans, furloughed and terminated employees, remote employees, representations and warranties relating to compliance with PPP loans and state and federal directives, and new indemnification obligations and escrows.
This article focuses on COVID-19’s effects on pre-M&A operations, the due diligence process, and changes to purchase agreement provisions from the perspective of a seller of a middle-market target company.