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Tax, Audit & Assurance, Mergers & Acquisitions

The Impact of the COVID-19 Pandemic on M&A Deals

The Coronavirus pandemic has had a major global impact on all sectors and industries. It has caused hundreds of businesses to cut back on their operations or shut down. The pandemic is expected to generate a loss of $3.94 trillion in global economic output. Fortunately, M&A activity has managed to persevere during the pandemic; however, there has been a series of notable shifts in buyer and seller activities, with greater emphasis on due diligence. In this article, we discuss the pandemic’s effect on M&A deals.

Shift to Buyer-Favorable Market

Before the pandemic, M&A deals mainly favored sellers. Sellers would receive various competitive bids, allowing them to dictate deal terms and valuation. However, the pandemic has created increased uncertainty, forcing many buyers to pull out. As a result, sellers must choose between limited buyers and may not drive negotiations as they had previously done. There are also more strategic buyers in the market than financial buyers.

Increased Due Diligence

There has been a rapid rise in business uncertainty because many businesses have suffered monumental losses during the pandemic. This plays a vital role in buyer-seller negotiations and has made it increasingly difficult to prepare a mutually beneficial deal.

Increased business uncertainty is also forcing buyers to perform increased due diligence and more closely examine variables such as supply chain management, security, employee, and government impacts. This rise in due diligence has impacted the pace of M&A deals, which are taking longer than usual to complete.

Valuation Challenges

The COVID-19 pandemic has also created valuation challenges, with buyers and sellers considering new metrics and variables to determine a company’s worth. Some of the most common factors driving buyer-seller negotiations include:

1.    COVID Add-Backs

When buyers analyze a company’s financial performance, they typically look at the consolidated net income or EBITDA, earnings before interest, taxes, depreciation, and amortization. One of the pandemic’s effects on M&A deals is that buyers and sellers must now account for COVID add-backs and adjustments in the company’s EBITDA.

The pandemic has delivered unexpected losses to otherwise stable companies. As a result, most sellers request an adjustment to EBITDA accounting for any unusual and extraordinary non-recurring losses that hurt their revenue last year. This clause allows for a fairer valuation of the company’s profitability by addressing the impact of the pandemic on the company’s financial performance.

2.    Earn-out and Clawback Provisions

Buyers are increasingly using earn-out provisions to secure themselves against potential losses, if the company fails to meet their expectations. Under this provision, buyers do not pay the total purchase price to the seller at closing. They withhold a portion of the price for the future, with payment depending on how the company performs. The earn-out provision essentially protects the buyer from making an overpayment if the company’s performance declines or remains stagnant.

This can also benefits the seller; if the company’s revenue gets restored to pre-pandemic levels, the purchase price will increase. Consequently, the seller will receive a higher amount when the buyer makes the final payment.

On the downside, earn-out provisions also increase the risk of disputes between buyers and sellers. It is essential to account for these disputes and how they will impact the value of a transaction before closing the deal.

There has also been an increase in clawback provisions. Equity clawbacks are provisions in M&A deals that allow a seller to benefit if a buyer sells the business.

3.    Material Adverse Effect

Deal parties are also having prolonged debates on whether they should account for the COVID-19 pandemic as a material adverse effect or material adverse change. These are changes in circumstances that can have a significant impact on the value of a company. Including the material adverse effect clause allows the parties (usually the buyer) to abandon an M&A deal if a material adverse change occurs between the interim period of the transaction.

So far, numerous acquisitions are coming with the added condition that the pandemic has had no material adverse change on the company in question. Excluding the material adverse effect clause is currently beneficial for businesses and industries that are more likely to experience heavy losses due to the pandemic.

Developing Strategies that Factor the Impact of COVID-19 in M&A Deals

With the M&A market shifting, it has become essential for companies looking to sell to develop M&A strategies that account for the changes brought on by the pandemic. For instance, how has the pandemic impacted their revenue and expenses? Which expenses can the buyer expect to return post-pandemic? What can the company do to bring revenue to pre-pandemic levels?

It is also vital to take the long-term view when pitching to investors. Instead of discussing the company’s expected performance in the next six to 12 months, they must focus on the next few years. It can also allow sellers to present a more positive outlook where the pandemic is no longer a driving factor behind its revenue and losses.

Sellers must also be prepared to answer questions such as whether the company is equipped to address and handle the challenges posed by the pandemic and what it will do in the event of future shutdowns. One way to address these concerns is by highlighting how the company has embraced digital transformation and preparing future-ready business models.


Like other sectors and industries, the M&A market has also felt the pandemic’s impact. So far, pandemic effects on M&A deals include:

  • A buyer-favorable market
  • A rise in buyer due diligence
  • Additional provisions that protect buyers and sellers against potential losses.

Some of the most commonly used provisions include earn-outs, clawbacks, and COVID add-backs.

If you are planning to acquire another business or sell your business and need help with preparing an effective M&A strategy, contact the team at Windes. We can help you formulate a strategy that maximizes business value and allows both parties to achieve their goals. Click here to learn more.


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Working out the details of a M&A transaction can be complicated. Contact Jim Cordova to explore your options.
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