How should buyers change their approach to due diligence in light of the COVID-19 pandemic?
As a result of the pandemic, in most cases buyers will not have the luxury of assuming that the target company's recent past performance will be indicative of its future performance. In addition to analyzing the direct impact of government orders to temporarily cease operations on the target company, buyers need to determine the anticipated impact of the sudden and severe economic downturn on the target's business.
Buyers will need to conduct a deeper dive into the financial health of not only the target itself, but also its key customers and suppliers. The location of said customers and suppliers also becomes increasingly important. Key customers and suppliers that are currently financially stable, but which are located in nations or cities currently on "lockdown" or considered likely to impose such measures in the near future present risks that must be considered.
Because of the more intensive and extensive diligence necessitated as a result of the pandemic, in addition to new, complicated issues requiring lengthier negotiations between the parties, deals will take longer to complete. In anticipation of this, buyers should insist on longer exclusivity periods in their term sheets.
This is a fluid and rapidly changing situation and these resources are current only as of the date of publication. We recommend that you contact your local Quarles & Brady attorney regarding the most up-to-date information or with any other questions regarding this subject matter, or contact Peter Spier: (312) 715-5058 / [email protected].