What Buyers And Sellers Can Expect To Change In The Financial Due Diligence Process

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Stock market chartAs both short-term and lasting impacts continue to unfold the further we move through the era of the COVID-19 pandemic, buyers and sellers that temporarily withdrew from M&A activities may be itching to get back out there. Despite dry powder hitting record highs at the beginning of 2020, M&A was derailed as buyers were focused on keeping their current portfolio companies afloat, and sellers were focused on keeping their doors open while reviewing government funding programs. The disruptions that hit the market at the onset of forced business shutdowns and temporary closures struck our industry hard, and many groups took a backseat in buying or selling, hoping to wait out the damage before reentering the business world. Now, the reality is that to survive, M&A activity must continue, despite the unpredictable environment with no end in sight.

What can buyers and sellers expect to change in the financial due diligence process? If your answer is “a lot,” then you’re correct. Brace yourself for change – ride that wave – and find yourself on the other side of this crisis with a bit of success under your belt. Consider the following ideas and find clarity in an uncertain world:

Customer and Vendor Relationships and Concentrations are Key

As customers begin to pick back up on their regular buying patterns and when you see an uptick in sales, make sure you’re tracking and studying this data. Full analysis of the supply chain, both forward and backwards, are crucial as the macroeconomic factors of the pandemic may have a delayed financial impact depending on the industry, customer segment or geographic region. Are your typical customers buying again? What are they buying? Are there significant international customers? How has the pandemic impacted that country and how has their government responded? Are popular, in-demand offerings not selling? Are your services no longer needed? Assess these trends now and in the months (maybe years) to come. Further, examine the changes to your revenue and compare it to pre-COVID-19 levels, during and post.

Consider the vendor (or customer) agreements that are in place, which can provide a forecast into future activity. Have disruptions in the supply chain caused pricing fluctuations that have reduced the gross margin on a key product? If a vendor or customer, at this time, is not performing up to these established standards, there may be legal remedies to this situation.  

Now and Later

As you think about these aspects, you might determine what effects will be temporary versus permanent. Temporarily speaking, we’re witnessing a decline in discretionary spending while also experiencing travel bans, supply chain disruptions and exchange rate fluctuations. However, can you expect changes in return policies or warranty procedures of certain goods that may leave more than a temporary impression? On a lasting, permanent level, business owners must consider technology and remote work capabilities for their teams, market share reductions and even business model changes.

What Becomes of Your Workforce?

Sometimes overlooked during a transaction, the workforce and management that a potential buyer is assuming upon acquisition can make or break future performance. Now more than ever, employee welfare and safety precautions are pivotal to minimizing “flight risk” and ensuring employees can do their best work. In the period most people are deeming “post-COVID-19” (or the one in which staff return to the office at an appropriately safe distance), it is crucial that employers determine your company’s safety protocols and implement them to ensure everything in your power is done to provide your employees with safety and comfort. Then, communicate and communicate some more. Staff need to be reassured that the resources you offer have the employees’ best interests in mind and that you’re committed to their well-being.  

To adhere to new social distancing standards at facilities, consider what capital expenditures are needed immediately to ensure employee safety while still maximizing production. In some instances, production levels may be permanently less than those prior to COVID-19. New market opportunities, nonetheless, might present themselves as a result of a requirement for a socially distanced workforce.

Working Capital Considerations

A direct impact of the pandemic has been the change in working capital from historical norms. As a result of customers withholding payments longer, a decrease in revenue generation and companies holding cash as long as they can, the cash conversion cycle for companies is vastly different from levels for typical operations. Additionally, CARES Act financing programs have given some relief to recipients. However, the ways in which these liabilities are recorded, as well as if certain liabilities will be forgiven entirely, remain in question.

When approaching a letter of intent, have a clear explanation of what is and isn’t included in the calculation of working capital. And be sure to note whether pre/post-COVID-19 levels are to be utilized to get the deal done and minimize headaches at the finish line.

Closing Thoughts

This time is all about analyzing where you were before the pandemic, where you currently are and where you can be. Consider supply chain weaknesses, concentration of vendors and customers, employee welfare and cash conversion cycles to determine what opportunities or possible repercussions can ensue post-acquisition.

In these chaotic times, clarity during due diligence is at a premium. Contact our team to discuss your situation and how we can bring success to your company during this time.

This publication contains general information only and Sikich is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or any other professional advice or services. This publication is not a substitute for such professional advice or services, nor should you use it as a basis for any decision, action or omission that may affect you or your business. Before making any decision, taking any action or omitting an action that may affect you or your business, you should consult a qualified professional advisor. In addition, this publication may contain certain content generated by an artificial intelligence (AI) language model. You acknowledge that Sikich shall not be responsible for any loss sustained by you or any person who relies on this publication.


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