Tips to Navigate Mergers and Acquisition Deal Terms During COVID-19

The mergers and acquisitions (M&A) market has experienced significant disruption during the COVID-19 pandemic. Parties currently in the process of negotiating a deal or working toward closing are likely to be affected.

Below, we explore potential transaction challenges and tips for involved parties to approach deals and negotiations.

Working-Capital Adjustments

Predetermined working-capital amounts that were assumed in a purchase price might no longer be applicable to the current environment.

A common approach to determining working capital mechanisms and targets—and one that’s perhaps the path of least resistance—is to reference the average level of working capital for the most recent months, excluding certain adjustments.

However, the determination of working capital mechanisms and targets will have some unique challenges during COVID-19. It’s important to perform additional work and granular financial analysis to determine the appropriate time periods and adjustments.

Buyers can better determine the amount of working capital by considering the following factors:

  • Aged accounts-receivable and the determination of estimated customer collections— consider excluding significantly aged receivables from working capital and treat them as debt-like items
  • Aged accounts-payable including nonrecurring penalty payments
  • Valuation of inventory such as slow-moving items, inventory obsolescence, and short shelf-life
  • Working capital holdback to provide security until working capital numbers are finalized post-transaction

Purchase Price Protection

With much uncertainty in the economic landscape, it’s challenging to align valuation expectations between buyers and sellers and execute M&A deals at the right price.


Buyers could consider bridging valuation gaps by establishing an earn-out mechanism as part of the purchase price. An earn-out is an effective way to align incentives and can help hedge against market uncertainty by shifting some of the purchase price to be paid in the future on the realization of future earnings.

Investors should consider the earn-out strategy in deals and allocate more time and effort to setting milestones during the closing phase to avoid future disputes.

Representation and Warranties

The representation and warranties market has evolved rapidly and is likely to take on increased scrutiny, especially for businesses that require additional representations and specific disclosures.

It’s critical to conduct tailored due diligence on the pandemic’s effects of the target business. Recent events should be addressed during the due diligence process including:

  • Impact of travel restrictions and nationwide shutdown measures on projected revenue
  • Impact on operation triggered by the supply chain disruptions and inability to fulfill customer orders
  • Impact of decreased product or service demand on projected revenue

We’re Here to Help

To learn more about how to approach due diligence and M&As during these complex times, contact your Moss Adams professional.

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