The COVID-19 pandemic has changed the way in which many businesses operate. Because of this, there are now a number of new risk factors you must consider in making your decision if you are thinking about buying a business now or in the future. Here are some areas you should pay special attention to during the due diligence stage of any transaction in the post-COVID landscape.
Third Party Agreements
Many businesses affected by COVID-19 have experienced difficulties fulfilling their outstanding agreements. In these cases, the businesses will have examined these agreements in detail to determine if the contracts give any room for relief. In many cases, businesses may try to rely on “force majeure” clauses to suspend their obligation, citing unforeseen events outside of either party’s control. Additionally, some contracts may contain “termination for convenience” provisions, allowing a business to terminate the agreement for any reason after providing notice to the other party.
If you are considering buying a business, you should carefully examine the outstanding contracts of the business to determine potential risk factors. Do any of the contracts have the option to grant relief for non-performance? Are any contract counter-parties in default of their obligations? These questions will help determine the possible outstanding risk factors of the business you plan on purchasing.
Supply Chain Disruption
An important part of the due diligence stage will be analyzing the target business’s supply chain. Because of COVID-19, many global supply chains have experienced considerable challenges. It is important that you have a thorough understanding of any risks the target business may have because of its supply chain.
Typically, business interruption policies will only cover losses that result from damage to the physical property or assets of the business. However, some business may hold specialized policies with varying degrees of coverage. It is important to carefully examine the terms of any insurance policies held by the target business to determine what coverage will be available in the future.
Businesses across the world were forced to quickly implement new technologies into their operations in order to stay afloat during the COVID-19 pandemic. During the due diligence stage, it is important to examine the IT systems that the business has in place currently to determine whether these systems will fully meet the needs of the business or if changes must be made, and to outline any potential security risks to the business’s confidential information.
Many businesses were forced to make major changes to their staffing during the COVID-19 pandemic. Layoffs, compensation adjustments, and changes in employee roles all have the ability to bring about legal claims against the business. Depending on the actions taken by the business, it is possible that there are outstanding employment related legal issues.
Additionally, you should examine the safety policies of the business you are interested in. COVID-19 has brought about many new regulations and guidelines. During the due diligence stage, ensure that the business has the ability to meet necessary regulatory requirements and can ensure employees are able to come to work in a safe manner.
Many businesses have taken advantage of the government’s COVID-19 assistance programs. These programs helped stabilize the economy and prevent job losses, but it is important that you understand the requirements and risks relating to these programs. For instance, businesses that are found to have manipulated their earnings in order to qualify for the Canada Emergency Wage Subsidy (CEWS) will face large fines should the Canada Revenue Agency perform an audit. During the due diligence stage, seek a listing of all benefits the business has received through government assistance, the terms and conditions of these programs, and assurances that the business has followed all of the terms of these programs.
Additionally, businesses have been offered the opportunity to defer certain federal and provincial taxes until later in the year. Ensure that these deferrals are properly accounted for in your purchase agreement.
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