In the latest data from the Office of National Statistics, it showed figures of 20% of businesses continuing to trade, for all industries had experienced more innovation from the challenges faced by COVID-19. This seems to include businesses looking at each other in terms of joined up working practices, mergers and joint ventures.
With COVID-innovation continuing to refine the way in which businesses operate, this update will focus on what to look at when joining or being involved in a business in light of COVID-19. The next update will focus on tips on what to get right on joint ventures.
Look before you leap. What you need to be aware of when assessing a business
The following focuses on some key areas and provides simple points to consider when evaluating a business.
- Insurance
The uncertain economic outlook has driven to the fore, the following key issues:
- What the business interruption cover is;
- The extent of any professional indemnity cover;
- What product recall cover there may be;
- Looking at a comparison of previous insurance policy information to check the criteria for continuity cover to be under ‘an existing, or previously known disease’. This has shaken the hospitality sector in particular, as the basis of COVID-19 falls outside of this as new disease, regardless of strains; and
- Any issues on quality of product/service as the real pressure on suppliers and third-party contractors could also increase the risk of an insurance claim due to sub-standard performance.
- Material contracts and Supply Chain
In light of Covid-19 and the disruption to business generally, key enquiries should include:
- Have any material terms been waived (which might affect future enforcement);
- Has any party to any contract sought to invoke a Force Majeure clause or otherwise sought to terminate the contract;
- If not, what re-negotiation of customer or third-party contracts there has been;
- How the business assesses what revenue/profit is generated under any of its contract(s) and whether there are any contractual arrangements that cannot continue to be performed on a profitable basis; and
- Any practical consequences from enforcement.
In terms of any supply chain, any weaknesses caused by COVID-19 need to be both examined and assessed.
- Employees
Key areas here include:
- Whether any employees have been furloughed or if a redundancy program has been started;
- What the work from home policy has been and how effectively it has worked;
- How the business has complied with Covid-19 related legislation;
- A particular focus on health and safety around the workforce and UK Government policy;
- What compliance there has been on the internal HR policy and procedures;
- To what extent the business has been receiving funding under the UK’s Coronavirus Job Retention Scheme or any other government funding ; and
- Summing up the long-term commercial impact on the business.
- Government Funding
The key focus here needs to be the amount and extent that the business is reliant on any government funding or tax advantages (other than the Coronavirus Job Retention Scheme).
- Management
As a result of the crisis management approach that so many businesses have had to adopt, key questions for the management need to be around:
- The day to day management of the business;
- Data protection issues;
- Corporate governance arrangements and record keeping; and
- Any anti-corruption issues.
- Working Capital and Finance
Solvency is the key question here. A commercial sense of the liquidity pressure or increased working capital requirements is also important, but the more interesting question would be around how the business has tried to relieve this pressure by re-negotiating its supply chain, lease arrangements or employment.
The other key area to understand here would be both the existing lending facilities and the approach of the business management to them plus how they have been extended/re-negotiated/maximised.
Being aware and having a sense of a downturn in business in relation to the terms of any facility agreements, which could trigger financial covenants or default will be really important.
- IT
IT systems in all business have not just had to cope, but proactively adapt because of Covid-19. An example of a key issue will be how they can then support the business moving forwards and what investment would be required. Another key question needs to be around disaster recovery systems, how robust they are and when they were last tested.
- Property
As many of us have been working from home until relatively recently, this has had a negative impact on many businesses, including of course high street retail.
The key property questions to ask in relation to any lease should be:
- Whether the business has sought to exit the lease or the landlord has sought to terminate;
- The extent to which negotiations for rent holiday or rent deductions with landlord(s) have taken place; and
- Health and safety and access issues.
In conclusion, the old adage about failing to prepare and then preparing to fail never seemed more relevant than when assessing a business prior to any involvement with it.
We have focused on legal due diligence but any financial due diligence will also need a re-think. Clearly, the usual focus on historical performance information may now have a perceived lesser relevance than forecasted information.
The key conversation will be about what working capital may be required to make a business profitable again or to re-start the business after having been “moth-balled” and this should be a central focus.
We have specialists on hand to both advise and support you in assessing any business, and giving you both reassurance and assurance on whatever your legal need.
Please drop me an e mail or call if you need any further details and stay safe and well.
Roger
