Buyer beware and future business investments
The Covid-19 pandemic is causing disruption on many different levels for business owners and investors globally and being aware now and in the future of a “corona clause” in any contract will be essential for the future smooth running of your business, or the safe-guarding of your investment in a business that you are planning to buy or invest in.
One area which has seen use of this type of clause highlighted recently is in loan documentation. This would be beneficial to the borrower or company in receipt of the funding, but investors should be wary.
A situation could arise where a loan agreement includes a clause allowing companies to add back lost profits that stem from an “extraordinary, unusual, infrequently occurring or nonrecurring loss, charge or expense.” This would have the purpose of keeping debt levels within specific multiples of operating income.
Losses caused by coronavirus could be incurred in relation to existing business that was cancelled or put on hold. Businesses seeking funding in the future, perhaps through offering a shareholding in the business may wish to add these back estimates of revenues that would have been received had it not been for this extraordinary pandemic event. It will of course be difficult to predict whether a business could have achieved this level of profitability in the past or will again in the future, due to how the business environment will change and businesses will need to adapt.
If you are considering investing in or buying any business, it is essential to be aware of all of these and other considerations before making an informed decision.