Legal Updates

Buying a Business in Covid-19? Due diligence issues to consider

Like many other big decisions, before buying a business you need to ask the right questions.  This is known as due diligence (“DD”) and should involve assessment of the financial, operational and legal affairs of your target business.  Done well, DD will help you to more fully understand your target’s business, identify and assess financial, legal and operational risks and opportunities, and inform whether and at what price, you want to proceed with the acquisition.

As a result of Covid-19, your DD considerations should expand to identify the nature and scale of any Covid-19-related impacts on your target’s business.  As the potential impacts of Covid-19 vary significantly across businesses and industries, the list below is only an example of specific considerations you may want to take into account in your DD process.


1. Compliance with Covid-19 requirements & appropriate implementation of internal policies and procedures

Investigate whether your target is subject to specific Covid-19 legal requirements, and if so, whether it has complied with those requirements.  For example:

  • Does the target operate in an industry subject to mandatory vaccination orders, such as within the healthcare and education industry, Managed Isolation and Quarantine or border related industries? (see here for more information)  Have all required employees/contractors of the target been vaccinated?  When will they be required to obtain/be eligible for vaccine boosters?

  • Is the target business supporting unvaccinated employees to get vaccinated and complying with new legislative requirements for notice periods/paid time off work for employees to get vaccinated? (See here for more information). 

  • Have any key employees or contractors of the target business ceased their employment or contracts with the target business because they are unvaccinated? Is there any exposure to risk of a claim against the target business as a result of that cessation of employment or contract?

  • Does the target business have clear internal policies and procedures for staff, customers, clients, contractors and others visiting premises/work sites?  If so, have these policies been implemented appropriately and are they followed?  If not, what would the cost of developing, implementing and enforcing policies of this nature be?

  • Has the target business complied with any trading restrictions imposed as a consequence of Covid-19 (such as the previous Alert Level System and current Covid-19 Response Framework (or Traffic Light System)?  If there has been any non-compliance, what sanction or consequence has or does the target face as a consequence?

  • What is the financial impact on the target’s business as a consequence of compliance with Covid-19 legal requirements and/or internal Covid-19 policies?  Does the business have models of the potential impacts of a deterioration and/or improvement in the trading environment as a result of Covid-19 (including changes in Government-imposed restrictions)?

2. Purchase Price

Investigate whether the purchase price of the target business will be (or should be) affected by Covid-19. 

For example, is there an earn-out provision in the agreement for sale and purchase of business (i.e. a provision deferring payment of part of the purchase price, and providing the vendor’s entitlement of an additional amount at a future date if certain conditions are met)?  If there is an earn-out provision, how is it to be affected by Covid-19 related impacts? 

Could an earn-out provision provide protection/comfort for you as a purchaser when entering into the transaction at an otherwise uncertain time?


3. Material contracts

Investigate whether material contracts of the target business (for example, contracts with suppliers or distributors, leases, contractors, customers) provide relief due to Covid-19, and if not, whether they should provide relief.  

For example, a material contract may require the business to purchase or deliver minimum volumes or quantities of goods.  In this situation, you should identify whether or not the contract penalises the target business for failure meet those standards where the failure is a result of Covid-19.  On the other hand, the target business may be party to a contract providing that it will receive at least minimum volumes or quantities of a good.  In this situation, is that revenue guaranteed despite Covid-19?  What is the impact for the target business if those minimum volumes or quantities are not met (i.e. are there flow-on consequences in terms of other contracts?).


4. Representations, warranties and covenants

You should consider whether any Covid-19 specific representations, warranties or covenants should be included in the agreement for sale and purchase of the business, to ensure the right balance of risk related to Covid-19 is struck as between vendor and purchaser.

For example:

  • How does Covid-19 affect the existing representations and warranties in the agreement for sale and purchase?  Is the target business required to disclose certain impacts of Covid-19 and the entity’s response to it?

  • Should a specific representation and warranty be given as to vaccination status of employees or key employees?

  • What scope does the target business have to respond to Covid-19 in the period between signing an agreement for sale and purchase and completion?  Is there sufficient flexibility for the target business to respond quickly to a change in circumstances (such as a snap lockdown) without impacting its representations, warranties or covenants?

  • Should a material adverse change warranty contain an exclusion for the impacts of Covid-19 (and if so, to what extent)?

5. Covid-19 relief from the Government

As part of your DD you should be checking whether or not the target business has obtained any financial relief from the Government, such as via the Wage Subsidy Scheme and/or the Resurgence Support Payment.  If so, you should check that these have been lawfully obtained and correctly used.  You should also consider whether any specific indemnities should be obtained from the target business in respect of potential breach of the requirements of these schemes.


6. Key financing documents  

You should also review the key financing documents of the target business and consider whether:

  • These documents have been complied with (for example, has there been or is there likely to be a breach of any financial covenants or other terms of a facility agreement as a result of Covid-19?)

  • Has the lender waived any requirements of those financing documents, or has any application for waiver of a requirement been declined?

  • Has the lender taken any steps to formally review ongoing funding to the target business, indicated a refusal to advance further funds or enforce its rights?

  • Are there any on-demand overdrafts or facilities that could be called up for repayment immediately)?  Is Covid-19 likely to impact on the potential extension of these facilities?

  • Is there an ability for the shareholders of the target business to contribute equity to remedy a financial covenant default?

Please contact us to discuss further

As the scope of your Covid-19 DD will vary depending on a range of factors, if you are considering purchasing or selling a business and require legal advice, please contact Sarah, Jono or Sean