Due to the uncertainty associated with the spread of COVID-19, we see that some transactions are slowing, pausing or even withdrawing at this stage of the coronavirus pandemic because companies are focused more on improving the working conditions of their employees and on keeping the company running; conversely, some transactions continue toward completion of the transaction without any delay.

As part of ongoing legal reviews of company’s, buyers can now be expected to pay more attention to the following areas in relation to the target company:

• The financial impact of restrictive measures on the target company, including any loss of income and pressure on working capital and liquidity;

• Examining the content of long-term contracts with suppliers and customers whether the contracts include quantity commitments, pricing arrangements, early termination options, sanctions, liability limitations, etc.;

• Determining whether critical suppliers of goods or services are able to continue the normal regime. In the event of a restriction on the supply of goods or the provision of services, it is necessary to determine what alternatives are available on the market which would allow the target company to continue to operate;

• What are the target companies' demands for funding, tax relief or government support;

• Finding out whether the target company has complied with all regulations resulting from newly issued legislation e.g. on the protection of employees or communication with regulatory authorities.

The unclear impact of the overall social situation regarding COVID-19 and related measures is also reflected in the fulfillment of the target companies' business plan and thus in the valuation of the target company. Some companies are currently experiencing significant fluctuations in the cost of inputs such as transport, energy, raw materials and even some inputs are temporarily very difficult to access. Together with the implementation of restrictive measures, a significant fall in the exchange rate of the Czech crown against foreign currencies has also occurred, which disadvantages importers. In this view there will in many cases be different expectations between the parties involved in the transactions regarding the valuation of the target company. The parties will not be able to rely on the return method of valuation of the target company, as revenues are completely unpredictable at the moment.

It may also be a challenge for the buyer during this period to procure debt financing of the purchase price of the target company using foreign capital. Basically, financial institutions are not able to finance new business cases in a short time. The reason for this is bank overload in connection with the resolution of contracts already concluded and insufficient ability to assess the risks of a new specific transaction. In view of this, it is not very likely that entrepreneurs will be able to obtain new loans in a reasonably short period of time for transactions that are not entirely standard from the bank's point of view and more than well secured.

For significant risk reduction to counterparties involved and to facilitate smoother mergers, acquisitions and business transactions, the conclusion of liability and warranties insurance in the transaction documentation (Warranty and Indemnity Insurance) could help. Like banks, unfortunately, insurers will have a more conservative approach to commercial risk insurance except for standard products that COVID-19 has no significant impact on (such as property title risk insurance).

It is likely that after the end of the coronavirus pandemic, both winners and losers will be on the market and there will be a number of new transaction opportunities. Due to the weakening of the market, it will be possible to make some acquisitions under very favorable conditions.

In any case, FORLEX is here for you! In the above-standard mode and in high demand we are ready to help you execute your transaction even during this crisis period, including legal advice on acquisition financing. Thanks to our wide specialization, understanding of the business context and detailed knowledge of current measures as a result of COVID-19, we are always ready to help you smoothly flow through your M&A transactions.