Sometimes an economic downturn can become an opportunity for savvy players to purchase a business for much less than it would typically go for. In the wake of Covid-19 there are, and will be many more small companies that will not have the cash or credit to survive. Rescuing these companies through a merger or acquisition can be the win-win that results in a strong enterprise capable of navigating through the storm.
What Legal Issues Could Make a Business Worth Buying (or Not)
If you have your eye on a struggling business or competitor that you are considering acquiring, you’re the one that’s best positioned to assess the value of the target company, but there are often legal issues that could make it more or less advantageous.
For example, the Hart-Scott-Rodino Act (HSR) requires companies to file with the Federal Trade Commission (FTC) and Department of Justice (DOJ) when merging or acquiring a company, but only if certain parameters are present, such as when the transaction is above a specific revenue threshold. With this in mind, an experienced NYC mergers and acquisitions attorney can guide you towards merging with or acquiring companies that fall below this threshold to avoid this scrutiny.
Why Would Now be a Great Time For Mergers and Acquisitions?
Before the economy was negatively impacted by the coronavirus pandemic, competition for companies ripe for acquisition was fierce, driving the prices of business acquisition targets much higher than their actual company valuations. While some sectors of the economy have gone dark, others are booming and unable to meet capacity. Food and Beverages companies such as restaurants or coffee shops, event planning companies, and consulting firms are companies to consider buying cheaply.
Many software companies are doing extremely well, with niche players expanding exponentially. Technology consulting companies and software as a service (SaaS) companies with some cash on hand would be wise to consider purchasing some more fledgling players, specifically tech startups, while they struggle financially right now, and before they become serious competitors.
Speaking of which, medium-sized companies can also get bargains, but only if they act quickly. The FTC’s 6(b) study revealed a loophole, so now the FTC will soon apply increased scrutiny to deals for smaller companies that might have been previously pushed through. The business world is changing massively and rapidly in the wake of the Covid-19, so it’s a good idea to contact an experienced mergers and acquisitions attorney as soon as possible if you spot a company that might be a great deal and want to jump on the opportunity and structure the purchase or sale of the company quickly.
This Window for Cheap Business Acquisitions Might Not Last Very Long
Just like the stock market, if you miss your buying opportunity you may not see it again for years to come. Policymakers are currently considering enacting emergency measures to halt mergers and acquisitions that are skirting scrutiny because of artificially low company valuations due to Covid-19. Plans are already in the works to empower antitrust enforcement with increased power to protect small businesses and consumers from growing concentrations of power.
It’s also being proposed that acquiring companies be forced to pay back a company’s SBA loans, which is a disincentive to acquisitions. It’s hard to say how quickly these new laws and regulations could be in play but there’s no reason to sit on a deal waiting until this happens.
You’re Ready to Do a Merger and Acquisition Deal, But Should You?
We have mentioned that time is of the essence if you want to buy a business for a much lower price than what you would have paid even two months ago. But before moving too far into a merger or acquisition deal, it’s important to speak to an experienced mergers and acquisitions attorney to discuss the merits of the potential business purchase or business sale and to plan a strategy for a successful transaction. The time to bring in your attorney is the initial Due Diligence/document request stages before negotiations start.
The Harvard Law School Forum On Corporate Governance recommends increased scrutiny of valuations during Covid-19, suggesting that it’s important to consider whether a company’s financial projections “still make sense.” It’s equally important to evaluate how pricing risk is allocated between signing and closing, as it’s not always possible to know how the coronavirus might continue to impact a business and the Due Diligence process.
In some cases, it may be wise to consider expanding the realm of Due Diligence not just to your business acquisition attorney but also to an employment lawyer about policies to ensure worker and customer safety through a transition period. Ideally you should work with a law firm that has both of these types of attorneys so they can easily collaborate.
There are great rewards in store for business buyers who are willing to consider taking advantage of low company valuations by moving forward with acquisitions during this time. These transactions can be complicated, bring in your mergers and acquisitions attorney early to steer you around the icebergs, and make sure the deal is structured properly and moves forward quickly.