The Evolution of Due Diligence in the Wake of COVID-19
COVID-19 has affected the financial performance of many companies, and buyers are treading cautiously during due diligence to determine the true impact of the pandemic on performance.
Here are five ways due diligence has evolved following COVID-19.
- Expanded EBITDA Analysis. Buyers look at EBITDA, but they are examining trends before and after the pandemic. What items have a one-time impact versus others that may be permanent?
- Top Line Impact. Buyers are looking for COVID-related losses or windfalls. Were such changes to revenue permanent? Or were they driven by the pandemic? It’s important for buyers to discern whether businesses struggled or thrived through the pandemic or because of it.
- Closer Examination of debt-like items. Has a demand drop caused inventory to age? Does historical working capital reflect current needs? How is a company accounting for the Paycheck Protection Program (“PPP”) funds? Has the PPP loan been forgiven? If not, it must be accounted for and possibly paid off by the seller before close.
- Vendor and Supply Chain Scrutiny. Buyers should carefully examine how a company’s supply chain has been impacted by the Covid pandemic. Have the negative changes such as delivery times, increased costs, etc. been accounted for in the forecast?
- Tax Evaluation. While the Coronavirus Response Act, CARES Act, and other legislation helped many, they left taxpayers and accountants with lingering questions. Buyers will want to ensure aggressive tax positions will not create future liabilities.
Due Diligence in a remote world has its challenges. Thankfully, the use of virtual data rooms and video conferencing services have greatly helped to facilitate the process. As transactions increase in the wake of COVID-19, sellers should brace themselves for increased scrutiny and a new category of questions borne from the pandemic.
Elvisridge Capital seeks established, privately held, middle- to late-stage businesses based in the United States. We invest in situations where our experience and resources can help generate significant profitability improvement and revenue growth. To begin a conversation, contact us at info@elvisridgecapital.com.
