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Due Diligence and the Impact of COVID-19

By Generational Equity

08/24/2020

Although all steps along the exit planning path are fraught with danger, none is more perilous than the 60-90 day due diligence process.

And that was before the impact of COVID-19!

Now more than ever before, it is vital that you are supported by experienced, professional advice as you enter the due diligence phase because it is at this timeframe when most deals often fall apart.

A recent article on this topic by Dan Schoenleber of the accounting firm Brown, Smith, and Wallace does a great job of summing up the issues of due diligence in our current environment:

As numerous states begin to reopen and businesses start to return to normal operations, management teams remain anxious about explaining the impact of COVID-19 to their banks, investors, stakeholders and prospective buyers. Each of the business decisions made during the pandemic has a unique impact on a company’s earnings. Since companies are often valued using a multiple of earnings before interest, taxes, depreciation and amortization (EBITDA), the consequence of mis-calculating the impact of COVID-19 could be immense.

We agree with Schoenleber. However, we have re-defined our recasting of EBITDA to EBITDAC, which takes into account the impact of the COVID crisis on earnings. In fact, we recently wrote an article about EBITDAC:

Now many of you who are reading this have likely never experienced the detailed pain of what due diligence can mean. Most due diligence checklists that buyers will submit to you will be from 200-300 questions long and will seek to examine every facet of your business in excruciating detail. Imagine the aggravation of 10 colonoscopies times another 10!

That, in the proverbial nutshell, is what due diligence can feel like. Don’t just take my word for it – listen to how a few of our clients have described it (and they had the benefit of our guidance to ease their pain):

The primary theme you hear through these wonderful real-life stories (and we once again thank each of these folks for participating in these interviews) is that due diligence is an extremely painful step and is perhaps the most important hurdle you will jump in your exit journey.

Keep in mind that each of these folks in the interviews above had the advantage of being part of the Generational Equity exit planning program and had access to the amazingly talented dealmakers that are on our team. Most would admit that getting through due diligence without an experienced deal team at your side is virtually impossible!

Schoenleber makes another really key point in his analysis of post-COVID-19 due diligence:

The seller’s preparedness, particularly if they engaged in sell-side diligence, will also be essential in the timeline of how fast things move post-LOI. Additionally, sellers engaging in sell-side diligence may also want to take more time on the front end to prepare for a sale to ensure that all bases are covered, particularly to evaluate whether some of the changes made during the pandemic were one-time or permanent.

I have bolded key parts of the quote to emphasize two key issues that again were critical even BEFORE COVID-19: Prepare in advance for key questions buyers will ask during due diligence AND make sure your documentation is accurate in relation to the impact of all recasting, especially where it relates to COVID-19. 

Once more the reality is this: Now more than ever before, having experienced exit planning advice is key to your successful exit. The great news is that buyers have really ramped up their activity over the past couple of months. We expect this to continue through the end of the year and beyond.

The Generational team is ready to guide you on your exit journey no matter if your timing is 6 months out or 6-plus years away. Please call us at 972-232-1121 or visit our website, leave your contact information, and we will be in touch.

Carl Doerksen is the Director of Corporate Development at Generational Equity.

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