Different potential solutions for transactions during Covid-19

The pandemic has created more uncertainty. This, of course, also has repercussions on company takeovers. There are opportunities to build more certainty into takeover agreements for both parties in times of unpredictability.

1. Earn-out

The earn-out option is certainly the best-known option. Under this option, a portion of the acquisition price is paid to the acquirer only when certain predetermined targets are achieved by the company. In most cases, the earn-out extends over several years.

In the latest M&A Monitor 2020 of Vlerick Business School, it was indicated that an earn-out solution is used in 31% of the deals. It is important that the targets are clearly defined and that the intervention of a third party is foreseen if there are indications that the earn-out formula has been 'steered' or influenced. However, this formula is only common when the seller remains connected to the company (e.g. through a service agreement) and can thus help to realise the set targets. Otherwise, his 'faith' lies in the hands of the buyer.

2.    Reversed earn-out 
It regularly happens that acquisitions are realised during an ongoing financial year. Acquisition prices are also often based on multiples of EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization). 

If the impact of corona on the current financial year is difficult to estimate, and/or an EBITDA correction because of corona is impossible, a fixed price can be agreed, part of which is blocked in an escrow account. The funds are only released once the year-end closing has taken place and the EBITDA of the company is known. Here, too, it is important to make proper arrangements and have the result determined by an externally appointed party.

In this case, there is no possibility of abandoning the transaction, but there is a guarantee that if the target performs poorly in the reference year, the buyer will be compensated.

3.    Transactionprotocol
When the buyer and seller have reached an agreement, but there is uncertainty about what will happen in the coming period, it is an option to draw up a transaction protocol. The transaction is then put on hold and the protocol includes: a step-by-step plan to eventually reach a signed agreement, a record of the status of the negotiations, a mechanism for a limited price correction, a possibility of termination for both the buyer and the seller in case the results fall outside certain ranges, and a timeframe.

The timetable stipulates a completion date which indicates by when both parties wish to complete the transaction. Finally, a long stop date is included, which serves as an official ultimatum after which the transaction protocol ends and no acquisition takes place.

It is a possibility that is not yet established in Belgium but that could be useful in specific cases. Private equity players will probably be less intended to use it, but it can certainly be an option in the case of a strategic acquisition.

4.    Normalisations 
The corona impact has certainly led to an increasing debate about normalizations, extraordinary costs and revenues. It is one of the reasons that have led to the postponement of various transactions in recent months and have driven buyers on the one hand and sellers on the other apart in terms of price discussion.

5.    Vendor loans
Although vendor loans are a payment modality rather than a corona phenomenon, they remain widely used even in corona times. It allows the buyer to meet his cash needs, assures the vendor of a good return and offers the bank a buffer.

During takeover talks, one of these options can be the final push to still achieve a balanced transaction, considering the current circumstances, and complete the takeover of the company.