The effects of the Covid-19 pandemic have been felt by everyone, with many or even most business being caught off guard and unprepared for what was to come in 2020. The Government and many organisations responded in various ways, with M&A activity in particular being impacted as a result.
Worldwide, there was a great deal of uncertainty in the market coupled with low business optimism and confidence, so it did not take long for M&A activity to slow down while buyers began to contemplate the future and their strategies.
M&A activity has since focused mainly on defensive deal strategies like asset sales instead of lender-forced transactions, and parties have therefore placed greater reliance on representations and warranties insurance due to this level of uncertainty. That same pressure has played a big role in slowing down deal closures, as buyers undertake a more intensive due diligence approach.
However, substantial government support programmes quickly became available, and included support for employees and payroll, as well as creditor forbearance schemes, which has subsequently allowed many businesses to live through 2020. The generosity of these government support programmes and grants during the pandemic led to the number of distressed M&A opportunities being lower than anticipated. Interestingly, for each buyer who hesitated or withdrew from a transaction, there was another who wanted to capitalise on the pandemic-induced volatility of that business.
The fact that M&A activity carried on was due to a combination of:
1. High investment capital levels, strategic and debt investors sponsored by private equity were willing to pursue transactions opportunistically;
2. The significant amount of demand and company leaders coming to terms with the reality of the Covid-19 impact on their business. Business owners decided to minimise risk and sell on; and
3. The evolution of closing and integration mechanics of M&A transactions. Many transactions incurred the time and cost of travel to and from law firm conference rooms to discuss ongoing transactional matters, whereas the introduction of applications such as Zoom and Microsoft Teams has been capitalised by lawyers and parties alike, therefore eliminating travel costs and allowing them to utilise their time more efficiently.
Going into 2021, the M&A market in the UK remains remarkably active. The pace of change which drove deals to extraordinarily high levels prior to the Covid-19 pandemic has been accelerated by changes in behaviour and attitude which the market simply cannot afford to ignore. The impact of digitisation and increased focuses on purpose and sustainability are continuing to shape today’s world and adds to this imperative for businesses to act.
The current situation remains uncertain as different variants of the Covid-19 virus continue to make appearances in the UK. But while lack of preparation was an issue for many at the beginning of the pandemic, it’s becoming clear that this is no longer an obstacle to overcome, as businesses are now able to identify the opportunities available to them now which in turn will enable them to improve their position for guaranteed success in 2021 and long after.
Future M&A planning and due diligence strategies
Opportunities in 2021 are forthcoming for businesses that are in the right place to capitalise on them, whether these opportunities open up new markets for them or simply allow them to bargain on acquisitions. Planning and due diligence is therefore key for those who have maintained a strong position throughout the pandemic.
In addition to undertaking enhanced due diligence, parties should also consider the following when exploring M&A deals:
1. New Lease: potential buyers may want to consider entering into a new lease with appropriate break or rent suspension clauses in the event a property cannot be occupied due to unpredictable matters such as Covid-19;
2. Earn-out provisions: this is now a common feature of transactions. Earn-out provisions benefit the buyer as it ensures the ultimate consideration paid corresponds with the success of trading, which in turn can benefit a seller if otherwise a price reduction would be negotiated due to a temporary downturn (as a result of Covid-19); and
3. Government Assistance: with businesses having taken advantage of schemes such as Coronavirus Business Interruption Loan Schemes (CBILS), bounceback loans, furlough and business rates relief, this has led to a heightened level of due diligence required and additional protections included in any agreement to ensure that the buyer is covered against government clawbacks as a result of improperly claimed assistance during the pandemic.
So, for M&A planning and due diligence to be successful, it is important for businesses to be clear and certain about their acquisition goals ahead of time. It is more important now than ever to assess how a business or asset acquisition will fit in with your business strategy going forwards.
It’s therefore important to include professional advisors (including for tax) early on in the planning stages of those acquisition strategies, enabling them to provide the most relevant and comprehensive planning and implementation advice possible and anticipating potential hurdles and risks involved to you, so that room is left for plans to be adjusted before unnecessary costs are incurred. To speak to a specialist in mergers and acquisitions, please contact Farleys’ corporate law team on 0845 287 0939 or send your enquiry by email.