Updated on March 15, 2023

Due diligence is an essential step in the process of purchasing a business and there are a number of pandemic-related considerations.

Never in recent history has a global event such as the pandemic had such a significant and rapid impact on the M&A landscape.

Since the onset of the pandemic crisis, all established transactional paradigms, such as market-recognized valuation multiples, historical profitability and all other performance measures, have been reviewed.

Can we continue to evaluate a business on the basis of its financial projections and past profitability when it has been hard hit by the turmoil of the COVID-19 pandemic?

  • How will upcoming transactions be structured?
  • Will a larger portion of the purchase price be payable at some future date based on the attainment of certain profitability criteria?
  • Will the use of financial instruments convertible into shares based on certain factors be more frequent?

In any event, the M&A world has adjusted to this reality and to an environment full of uncertainty.

Business opportunities for some buyers

At the same time, this pandemic and its resulting events also provided opportunities that strategic acquirers and investment funds have been looking forward to.

Such transactions will have to be based on a thorough due diligence review adapted to the current situation.

  • How should due diligence be adjusted for issues such as the ability to meet with management in person, visiting the site and seeing the target company’s operations?
  • What role should seller or buyer/investor due diligence play in determining recurring profitability in the context of a global pandemic?

Here are five additional considerations for the buyer/investor or seller.

1. Determination of EBITDA (earnings before interest, taxes, depreciation and amortization)

It’s important to consider pro forma adjustments, in addition to the customary normalization adjustments, in order to highlight the business’s recurring profitability and exclude any temporary COVID-19-related impact. In some cases, COVID-19 was advantageous and resulted in increased sales and EBITDA. The seller will have to demonstrate that this is a recurring increase and the buyer will have to ensure that this is the case.

There is no standard formula. Here are some methods for quantifying pro forma adjustments.

Compare the evolution of EBITDA

It is important to compare how EBITDA evolved (considering seasonality) from pre-COVID-19 periods to the COVID-19 era. Performing this analysis by business unit, by product and even by customer will provide greater comfort to the acquirer. Some business units may be more affected by COVID-19 than others. It would therefore be advantageous to isolate these units from the rest of the entity’s activities.

Compare with financial projections

The pro forma adjustment can also be quantified by comparison with the financial projections. Obviously, the buyer/investor will need to ensure that the projections are established carefully and that, in the past, the company’s results have been fairly close to the forecasts made.

Adjust subsidies received

Adjusting the various subsidies provided by different levels of government to support businesses during this period is also useful, including the Canada Emergency Wage Subsidy (CEWS).

Adjust the salary expenditure

The salary expenditure must be adjusted and restored to a standard recurring level. Many companies have made cuts in salaries or laid off employees (temporary adjustment). What’s more, we have noted significant salary increases that ought to be considered.

Consider ongoing savings related to a reorganization

Ongoing cost savings associated with a reorganization during the pandemic should be taken into consideration. Several companies reacted quickly and implemented a cost-management improvement plan to deal with the situation. In some cases, these restructuring plans have resulted in permanent savings. The pro forma adjustment will therefore have to take this into account.

Obviously, it will be more difficult to justify such an adjustment if the restructuring plan exists on paper only and has not yet been implemented (layoffs, closure of business units historically at a loss, review of the manufacturing process, etc.).

Consider the gross margin loss

The gross margin loss related to the decline in sales should also be noted (see the following section on sales). It is important to properly validate the margin percentage used. The greater the degree of precision, i.e., determined by business unit or by product, the lower the need to question the adjustment.

Assess future supply costs

Future supply costs and their effect on EBITDA must be evaluated (see the section below on suppliers and procurement).

2. Sales

As was the case for EBITDA, it is important to understand the impact of COVID-19 on sales and its effect over time.

Analyze the trend in monthly sales

It is important to analyze the trend in monthly sales prior to COVID-19 by geographic area, business unit and even by customer, and to compare it with sales during the COVID-19 period. We observed some industries catching up in the months that followed.

Determine the entity’s position in the supply chain

With production stoppages, supply chain interruptions and surges in demand, it is important to determine whether the company has been or will be faced with supply problems, and to assess their impact.

Analyze the most important customers

Analyzing the most important customers and assessing how COVID-19 impacted them is essential.

Analyze financial projections

Financial projections should be analyzed with an emphasis on the backlog and pipeline, and how likely they are to be achieved by considering the historical earnings as compared to projections.

Assess collection issues

Any collection issues must be evaluated, as well as the future impact on sales to the customers in question. In addition, the provisions for bad debts at the end of the period and those forecast at the closing date should be reviewed in light of the information obtained.

3. Suppliers and procurement

Determining whether there is a dependence on certain suppliers or whether some important suppliers are located in the same region and are therefore likely to be affected by restrictions or lockdowns such as those in 2020 and 2021.

Investigate going concern risks

The going concern risks of certain suppliers must be investigated in order to assess the various contingency options.

Assess costs

The effects on cost prices must be assessed.

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4. Working capital

One of the complex components in a transaction is determining a target working capital.

  • What time period should be used?
  • Should projections be considered (since working capital requirements can differ)?
  • Are there any items that should be excluded from the targeted working capital and included instead in the net debt calculation, such as taxes and customer deposits?

These items are often discussed during negotiations between the parties.

The pandemic is certainly complicating matters. The following additional points should be considered in determining target and closing working capital.

Adjust various items

The various items affected by COVID-19, such as accounts receivable, inventory, and accounts payable and accrued liabilities, must be adjusted. The goal is to recalculate the “normal” level of these items during the months affected by COVID-19.

For example, a historical collection time rate could be considered for accounts receivable or a standard turnaround time for inventory. This avoids penalizing the vendor by using temporarily high working capital items in the calculation.

On the closing date, pay special attention to some items

Here are items that require special attention for the buyer/investor on the closing date:

  • Recoverability of accounts receivable without a provision;
  • Sufficient allowance for inventory obsolescence;
  • Occurrence of prepaid expenses;
  • Percentage of completion and appropriate evaluation of work in process.

If there are any doubts about these items, specific clauses should be included in the purchase contract, for example:

  • Adjustment clause after a certain period (normally 120 days) for accounts receivable without a provision at the balance sheet date that are still not collected after the period specified;
  • Clause stating that if inventories likely to be sold at a loss after the balance sheet date are in fact sold at a loss, the purchase price will be adjusted downwards.

It is always advisable to have a balance of sale that specifically protects the buyer against potential price adjustments.

An adequate target working capital that supports attainment of EBITDA for purchase price purposes should be determined. Any temporary impact of COVID-19 should be excluded from this calculation. This ensures that the seller is not penalized with a target working capital that would otherwise be overstated.

In addition to validating the target working capital adjustments, the buyer/investor must ensure that the various working capital items are properly valued at the closing date. If there are any doubts, clauses in the purchase contract should be considered.

5. Other considerations

Guard against insufficient capital investment

In an uncertain environment, an entity may be inclined to reduce capital expenditures or required to suspend them.

Whether it is a question of maintenance or capital expenditures, the buyer/investor must ensure that it properly assesses the consequences on the EBITDA determination or on future cash requirements to address the delay.

One way to guard against insufficient capital investments is to include fixed assets in the working capital calculation (target and closing) or to forecast a price adjustment based on the net tangible assets at closing.

Analyze management’s reaction to the pandemic

It is very worthwhile for a buyer/investor to analyze the management team’s reaction to COVID-19.

  • What plan was put in place?
  • How was staff supported and how were they mobilized?
  • Were difficult decisions made? How quickly?
  • What are the impacts on EBITDA during this period?

Consider review or audit engagement options

It is not always possible, for several reasons, to require audited financial statements at the balance sheet date. Given the magnitude of the closing balance, other options should be considered to protect the buyer/investor:

  • Review engagement;
  • Application of specific audit procedures by an independent auditor. Such procedures would focus on risk items, such as:
    • Confirmation of accounts receivable;
    • Physical inventory count tests;
    • Inventory price tests;
    • Sales and purchases cut-off tests.

Consider adding clauses

The buyer/investor should include several items in the purchase contract as a safeguard, especially in uncertain times. Here is a partial list of items to consider in addition to the usual clauses:

  • Be careful of the usual clause stating that the closing financial statements must be prepared on the same basis as the historical financial statements. With COVID-19, this may no longer be possible;
  • Adjustment clauses for the recoverability of certain assets included in working capital;
  • Sufficient balance of sale to cover certain purchase price adjustments;
  • Specific representation on the risk of having to reimburse the CEWS following a government audit;
  • Important changes and cases of force majeure. The standard clause must include specific wording related to COVID-19.

Our team of financial advisory professionals has extensive experience in providing guidance in uncertain times. They also have in-depth corporate financing expertise and privileged access to capital market stakeholders.

Don’t hesitate to contact us today. We will respond promptly so we can work with you to achieve your objectives.

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Jeannette Boulanger
Partner | CPA, M. Sc. | Human resources consulting

For many businesses, telework has been safe solution for remaining operational. But how to achieve successful teamwork in such a context?

Lockdown measures have revolutionized the way we work and telework is now mainstream. At the height of the pandemic last spring, more than 60% of Quebecers ended up working from home.

With everyone located off-site, it can be hard to get your team on the same page and focus on shared objectives. But before tackling the unique challenges of remote teams, it’s worth revisiting the basics of effective teamwork.

Effective teamwork is a shared responsibility

Even though every team is unique, there are three main pillars for optimal teamwork that apply across the board.

Setting clear expectations and objectives

Above all else, it’s important to establish common performance indicators. That is, how results will be measured and what targets team members are expected to achieve. When assessing these indicators, ask yourself:

  • Is everyone aware of and familiar with the company’s work and/or performance objectives? Is everyone on board to meet them?
  • Are the expectations and objectives specific, measurable, attainable, realistic and timely (SMART)?
  • Do all team members have the skills needed to achieve these goals?

Ensuring healthy interactions between team members

Next, it’s important to assess how people interact within and between teams. Each person’s attitudes and behaviours—both formal and informal—toward the shared objectives impacts the results. To assess this factor and determine if it needs to be addressed, consider the following:

  • Are there barriers that hinder interaction between team members?
  • Are team members able to influence each other?
  • How are decisions made within the team?

Implementing the right processes and procedures to ensure expectations and objectives are met

A third important aspect is your internal processes and procedures. They can help you assess each team members’ roles and responsibilities in relation to the established group objectives. When evaluating this indicator, ask:

  • What mechanisms are used for making team decisions?
  • What method is used for informal communications?
  • Do you have a telework policy?

Everyone is responsible for making sure the team works effectively. What’s more, everyone stands to gain by making this shared responsibility clear and implementing performance indicators aimed at helping you find solutions to problems as they arise.

Since workers are directly concerned by these three indicators, they can—and should—be part of the solution. After all, they’re in the best position to specify their preferences, flag issues that need improvement, propose ideas and develop strategies for improving the team’s work methods. Why not talk to your team about these issues today?

How to optimize your virtual team’s work

This isn’t going to happen magically. It’s going to take some effort. When the pandemic struck, telework was introduced so that workers could stay safe and organizations could stay afloat. Today, many businesses are reaping the benefits of remote work arrangements, but they’re also discovering the drawbacks. A number of specialist publications have noted that telework can negatively impact group cohesion and communication, as well as individual roles and relationships with authority.

Even though it’s up to both managers and team members to make remote work productive and pleasant, here are a few tips for stacking the cards in your group’s favour:

  • Choose high-performance tech tools that your team knows how to use;
  • Make sure the team’s goals are clear and engaging;
  • Focus on group leadership;
  • Define and support a structure that outlines each person’s objectives, roles, tasks and expectations;
  • Communicate clearly;
  • Document group discussions to make sure everyone is on the same page;
  • Keep virtual teams informed of upcoming changes;
  • Set aside time to check in with your team;
  • Take time to get to know each team member.

Interested in optimizing teamwork within your group? Would your workforce benefit from solutions that address specific organizational needs? Contact us for more information about our personalized team consolidation services. Our multidisciplinary experts would be pleased to recommend solutions tailored to your needs.

This article was written in collaboration with Marie-Pierre Chabot, Organizational Psychologist and Human Resources Advisor.

07 Oct 2020  |  Written by :

Jeannette Boulanger is a Human Resources Consulting expert at Raymond Chabot Grant Thornton. Contact...

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Alice Richard
Senior Manager | MBA | Management consulting

The pandemic has changed purchasing patterns and some new consumer habits are here to stay. Your business needs to adapt. But how?

New consumer habits are affecting all businesses, including those that cater to consumers (B2C) and those that serve other companies (B2B).

We’ve seen various new consumer trends emerge since the start of the COVID-19 pandemic. Here are the most striking.

Essentials-only budgets

Consumers are taking a cautious approach to spending and focusing more on savings. When they do open their wallets, it’s for essentials. Non-essential spending remains below pre-pandemic levels.

Online shopping

Online sales have increased in most consumer categories. In fact, Quebec recorded a 118% year-over-year spike in e-commerce transactions in 2020. The most dramatic increase was in online sales of household appliances, electronics, building materials and home renovation products, which skyrocketed by 625%.

Consumers have also largely embraced home delivery and in-store pick-up services. These changes are likely to be permanent.

Wavering loyalty

The crisis has shaken consumers’ loyalty to their pre-COVID favourites. In some cases, it’s because businesses didn’t have a robust online offer, while other reasons include complicated return policies and product supply issues. Faced with these obstacles, consumers were forced to turn to the competitors that had strong digital channels, including for essential expenses such as groceries or household goods.

Safety first

It comes as no surprise that the pandemic has led to a sharp rise in consumer concern for public health and safety. More than ever before, people want to know what businesses are doing to keep them safe.

Buy local

The pandemic has triggered a shift toward seeking products made and grown locally. This is particularly true in Quebec, where interest in buying local has risen faster than elsewhere in Canada [Léger and Lg2 Survey, May 2020]. In addition, several government and regional initiatives—such as Panier bleu and Stratégie nationale d’achat d’aliments québécois—have come out in recent months to encourage Quebecers to choose local products and services.

Does your business still offer what customers want?

To find out how these new trends have impacted your customer base, you’ve got to connect with your target audience, using whatever means possible. Your options include calling key customers directly, sending a courtesy email or short survey to your subscribers, or posting an open-ended question on social media. The simplest solutions are often the best ones. Once you’ve gauged their new needs and expectations, you’ll be ready to adjust your offer.

Realigning your value proposition

Your value proposition describes how you meet customer needs and differentiate yourself from the competition. It’s what makes you unique.

By defining or redefining your value proposition, you can gain a better understanding of your target market, while ensuring that you still offer what they’re looking for. In addition to being the basis for your sales pitch, your value proposition can help inform your communications content and digital strategy.

Given the recent shift in consumer habits, it’s essential to make sure your value proposition is still relevant. To get started, ask yourself the following:

  • What are your customers looking to accomplish?
  • What are their pain points?
  • What are their expectations in terms of value or perks?

Next, ask yourself:

  • How do your products and services create value for customers?
  • How do they address consumer irritants?

The answers to these questions can help you figure out how to effectively appeal to prospective and existing customers.

The exercise might also make you realize that your business model is outdated and no longer meets the needs of your customers. If that’s the case, you’ll have to reshape your business model to meet evolving needs.

Simple and relatively inexpensive changes can have a major impact on customer satisfaction, translating into improved retention rates.

With change happening all around us, maintaining the status quo simply isn’t an option.

01 Oct 2020  |  Written by :

Alice Richard is a management consulting expert at Raymond Chabot Grant Thornton.

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The International Accounting Standards Board (IASB) has published Interest Rate Benchmark Reform – Phase 2 (Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16), finalizing its response to the ongoing reform of interest rate benchmarks around the world. The amendments aim to assist reporting entities to provide investors with useful information about the effects of the reform on their financial statements.

Many interbank offered rates (IBORs) are expected to be replaced by new benchmark risk-free rates (RFRs) in future reporting periods. This has resulted in the IASB needing to address potential financial reporting implications for both before and after the reform of an interest rate benchmark. The IASB has completed this project in two stages, the first one focussing on providing relief for hedging relationships before the reform takes place, which was finalized in September 2019, by publishing Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39 and IFRS 7). This second set of amendments focuses on issues arising post replacement, i.e., when the existing interest rate benchmark is actually replaced with alternative benchmark rates.

Download the IFRS Adviser Alert for more information.

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