When Deals Face Market Volatility

By Steve Berman

M&A, dividend recapitalization, and employee stock ownership plan (ESOP) transactions currently in process will likely be impacted by the highly volatile market conditions created by the COVID-19 outbreak.

Regardless the deal format, details including price, structure, financing, and reps & warranties will be subject to renewed scrutiny prior to closing. This could result in re-pricing, changes in financing terms (regardless of commitments), adjustments to representations being made by sellers and, most importantly, the timing or likelihood of closing the transaction.

The key for business owners involved in these situations is to focus on their core business and to assess/clarify the state of their operations from various perspectives:

Short-term (3-6 months)

  • What is the expected impact of current economic conditions on your business?
  • How will your cash flow be affected?
  • Are there any material changes that need to be communicated and addressed to either your internal team or other deal parties?
  • Can you articulate your near-term action plan?

Mid-term (6-12 months)

  • How will your business recover once the economic environment stabilizes?
  • Do projections need to be revised to reflect the short-term effects?
  • Is your company poised to retain its customer base or even gain market share once the turbulence subsides?
  • Or, would a recovery include future re-capturing of any foregone near-term revenues or cash flow?

Long-term (1 year and beyond)

  • Do your extended projections need to be reviewed to acknowledge short-term business disruption?
  • Or, is your company still poised to realize its longer-term goals?

Detailed answers to these questions could very well determine whether an in-process transaction stays the course. It’s essential that sellers adequately articulate their thinking to any buyer.

Why? For a buyer, a clear understanding of a business’s value of critical. They’re trying to ascertain whether that value has been materially diminished by recent events. A buyer is also evaluating their ability to finance the transaction, with regard to both leveragability and the related terms/rates.

Essentially, a buyer’s confidence and willingness to consummate a transaction boils down to their knowledge of the asset they’re buying. Noise and doubt are hallmarks of uncertain times. A buyer or trustee’s comprehensive understanding of the asset in question, gained through on-going discussions with the seller and enhanced reps-warranties, can help breed comfort and confidence – and ultimately lead to a completed transaction.