The impact of COVID 19 on privately held businesses has been far reaching, but disparate. Some businesses have fared well.  Many service businesses, such as SAAS companies, which are capable of having their workforces deployed from home and whose services are delivered digitally without the need for personal contact, have hardly been affected.  Businesses that provide essential products and services, such as supermarkets, have been buoyed by increased demand and seen sales increases in double digit percentages.  And, of course, companies engaged in e-commerce sales and delivery services – think Amazon, UPS, DoorDash and Instacart – have done exceedingly well.  Not so fortunate are restaurants, entertainment venues and hospitality companies.

Despite the pandemic the reasons for buyers and sellers in all industries and market segments to consider and engage in an M&A transaction don’t go away. Strategic buyers want growth, expansion and operational synergies.  Financial buyers want to deploy their capital and utilize their industry expertise to achieve above benchmark returns. Sellers continue to weigh an M&A exit, whether due to retirement planning, inability to grow to the next level because of lack of capital (economic or human), or merely to take advantage of opportunities presented by business cycles or market anomalies.

With these forces at work the challenge that the COVID-19 pandemic presents to both buyers and sellers considering an M&A transaction is first to assess what general and permanent impact the pandemic may have on the industry in which the target business operates, and then determine how that general impact may specifically apply to the target business. After that assessment, both buyers and sellers have an interest in ensuring that the appropriate due diligence is conducted; i.e., with increased focus on the segments of the business that have been most impacted by the changes wrought by government mandates, health and safety protocols and customers’ responses to them.  In addition to that exercise, consideration should be given to what terms of the deal would need to be tailored to address the short and long term impacts that the pandemic has had on the intrinsic value and operations of the business.

Conducting appropriate due diligence in the COVID-19 environment essentially means that one should ask the question: “How has, and how will, the COVID-19 crises affect the target business?”  Some sample questions under that umbrella include:

  • How has the target managed its workforce? Have best practices been followed to keep employees safe?
  • Has quality control of products or services been maintained?
  • Have steps been taken to keep employees productive and to keep morale up?
  • Have employees been trained regarding appropriate practices while working remotely?
  • Has IT security been assessed and has it been adapted to any new working environments?
  • Have all government orders and protocols been adhered to?
  • Have any breaches or failures of contractual performance been excused by force majeure clauses, whether those breaches or failures are by the target or by third parties?
  • Will the likely restrictions on physical inspection of facilities as part of the due diligence investigation be problematic? Are there adequate “work arounds?”
  • If the target has a complex supply chain, has that chain held up? Are there material weak links?
  • Has a claim under a target’s business interruption insurance been considered?

When considering which terms of the deal should merit greater focus given the uncertainties surrounding the effects of COVID-19 on the target business, the principal one will, of course, be purchase price.  Buyers will try to assess whether the target’s recent financial performance, positive or negative, is temporary, and whether the pre-COVID-19 trends are likely to resume  Or are they permanent, and reflect a fundamental shift in the trend line or its slope?  It being likely that the answers to those questions are uncertain, both buyers and sellers will be drawn to the use of purchase price adjustment mechanisms, including some form of earnout structure.  While an earnout has always been an approach to allow buyers and sellers to bridge gaps in their valuation perspectives, given the systemic shock that the pandemic has caused to most industries and businesses, it is much more likely to be used in M&A transactions in the next few years.  Remember, when it comes to earnouts, the devil is in the detail.

If the parties can bridge the valuation gap by reaching agreement on price and terms, there still remain material terms and conditions that should garner more attention because of the uncertainties caused by the impacts of the health crisis and its aftermath.  Those include:

  • A well thought through MAE (“Material Adverse Effect”) definition and usage. While focusing on a MAE clause may seem like “closing the barn door after the cow has escaped,” it may be needed to assure the parties that if some as-of-yet-unknown development arises out of the COVID-19 pandemic, they will have  addressed how it will be handled.
  • Representations and warranties that are sharpened to deal with COVID-19 impacts, or on the other hand, that include appropriate carve-outs, such as:
    • Financial statement treatment of COVID-19 related costs
    • Tax impacts, including PPP loan treatment
    • Compliance with government orders
    • Employee and work force risks
    • Customer and supplier contracts or changes in purchasing or selling patterns, including major customer and supplier financial condition
    • Contract compliance and the use of any force majeure defenses
  • To the extent that an “ordinary course of business” carve-out is utilized in a Representation or Warranty, the parties will need to adapt its definition to take into account anomalies due to COVID-19 that may have caused the target to deviate from normal practices.

Finally, because of increased uncertainties caused by the pandemic, both buyers and sellers will be focused on the scope of seller indemnification obligations.  Representation and warranty insurance can ameliorate some of the uncertainty in the appropriate circumstances.  But a clear and balanced indemnification provision will be essential to properly allocate the risks and uncertainties between buyers and sellers.


While many M&A transactions for privately held business have been put on hold due to the COVID-19 pandemic, the forces at work that make M&A transactions a significant part of the search for above benchmark financial returns on the one hand, and a source of liquidity on the other, will not be kept at bay.  Those who are able to adapt to the uncertainties and risks of pursuing M&A transactions will be able to take advantage of opportunities and achieve their objectives. Those who are not adaptable may face even greater uncertainties.