Due Diligence process tips: COVID-19 considerations for vendors

DSW Transaction Services acts as a financial due diligence provider to both buyers and sellers. Despite the current environment, we have a number of deals ongoing in resilient sectors. However, the impact of COVID-19 and the UK lockdown is universal and the following is a summary of key areas we have focussed on more than under “normal” circumstances:

  1. Revisit your budget – every business we’re looking at has required a new base case budget for the current year (or longer). “Go back to your order book and pipeline and really challenge the timing of conversion, rollout and cash receipts. How have your customers and suppliers been impacted and have any been lost? Is the opening balance sheet updated to reflect the cash pressures the Business is likely to have encountered in March and April?”
  2. Scenario analysis– none of us has a clear view of the length of (modified) lockdown, the duration of relaxation of working restrictions or the “new normal”. Consider various scenario analyses modelling different severity of general trading conditions, speed of return to operating capacity and lag in pipeline rollout. “Sensitivity analysis is part of our day job, but is currently more important than ever. Investors and funders will value well thought out downside cases and, in our experience, will not penalise well-considered pessimism alongside the potential offset of realistic cost contingencies.”
  3. Have a rolling 13 week cash flow forecast ready – Ideally this will be part of your routine management information anyway, but if not get this prepared, possibly run it past your external accountant and keep this updated on a daily basis. Reflect clearly the cash flow mitigations you have put in place such as utilisation of the Coronavirus Job Retention Scheme, CBILS funding, VAT/NI deferrals and lease/loan holidays. “We’re asking to see this on every transaction at the moment. At the very least this will demonstrate good practice and help the buyer get a sense for short term cash requirements”.
  4. “EBITDAC” – Try to quantify the impact COVID-19 has had on underlying profits. Presumably your business demonstrated strong fundamentals in order to attract the interest of an acquirer and sight of this should not be lost. “Acquirers will accept that the core value in your business remains – albeit will be acutely aware that any COVID-19 profit adjustment will be challenging to quantify accurately and will therefore scrutinise this closely. Put yourself in the acquirer’s shoes and be prepared to provide evidence for your assumptions”.
  5. SPA considerations – Consider the impact of COVID-19 on the achievability of earn-out targets. Furthermore, consider the impact of, for example, stock build, increased debtor days, bad debt and VAT/NI deferrals on your assessment of normalised working capital. “We have already seen more focus on earn-out structures and a buyer preference for completion accounts mechanism over locked box in order to provide the buyer with greater protection.”

Should you be considering a sale process DSW Transaction Services can provide vendor assistance or vendor due diligence services which would address these points and ensure your business is ready for a buyside review. The NW partner team would be delighted to discuss.

Please contact Catriona Lang ([email protected]), Ed Brentnall ([email protected]) or Nicola Merritt ([email protected]).

Additionally, the rest of the DSW Group covers all manner of M&A services.

COVID-19 considerations for vendors