Conducting Due Diligence During a Pandemic

Companies go to the market and agree to acquisition for several reasons, from founders planning their retirement to staving off bankruptcy. Due diligence makes sure that all the process guidelines are followed and that the transactions are legal.

In mergers and acquisitions (M&A), due diligence informs the in-depth review and analysis of the target company in terms of both business operations and people. Effective M&A negotiation for a company involves addressing essential business issues and resolving them before closing the deal. Since M&A is always heavily negotiated, a poor transaction can lead to considerable risks for the selling company and its key stakeholders.

From a buyer’s point of view, due diligence helps understand the business, its owners, and its management operations. The buyer gets a better idea about the synergies between departments, processes, potential growth of the company with improved operations, and the business’s existing customer base. On the other hand, Sellers should prepare by conducting a thorough assessment to identify value deficiencies in the business.

Related: COVID-19 and Exit Planning. 

COVID-19’s Effect on Due Diligence

The COVID-19 pandemic’s massive impact on business resulted in significant and unprecedented disruptions. After an initial slowdown in M&A, transactional activity was expected to pick up the pace gradually as the economy began to recover. As society emerges from shelter-in-place mandates in the coming months, companies will look forward to divesting their non-core assets, acquiring distressed companies, offering financing to businesses facing liquidity issues, and forming joint ventures with firms either looking for exit investments or bringing on new partners.

The practically overnight shift from a physical work environment to a virtual also posed new challenges on the reliability aspect of due diligence, mainly concerning the ability to validate the information. Since prospective buyers and assessors could not conduct on-site visits, the transparency of the whole process was questionable. Other than this, buyers faced the issue of not inspecting original paperwork and documents that could not be digitized. Other tasks such as background checks, interviews with key employees, reference checks were also inconvenienced.

Both buyers and sellers should focus on specific due diligence considerations to evaluate new opportunities during and after the pandemic.

Material Contracts

Buyers should review the seller’s supplier and customer contracts to determine if the seller has breached, modified, or accelerated any terms concerning COVID-19. Any breaches should be addressed as soon as possible to decide how the responsibility of current commitments or potential future liability should be assigned between both parties.


  • Find if the target company has received or issued any force majeure notices that allow for non-performance of contractual business obligations.
  • Find out if the material contracts must be renegotiated or terminated (or have been served to terminate).
  • Whether the target company has threatened, breached, or defaulted any of its material contracts due to business interruption.

Financials & Solvency

Buyers, along with financial advisors, should conduct a thorough financial due diligence. They should work to find out if the target company is solvent or possibly approaching insolvency. If the target is insolvent, then its directors should take the appropriate steps to reduce liabilities.


  • Has the target company complied with warranties and covenants in all its existing arrangements with lenders?
  • In response to the pandemic, has the target company defaulted to any of its existing agreements?
  • Have arrangements or agreements with lenders been amended?

Supply Chain

Disruptions in supply chains have led to issues and delays in procuring resources. How did factory closures, limited staffing, and other limitations affect the target company’s ability to serve its customers? Did the company find alternate supply sources, and were those alternate sources more expensive in different ways?


  • How has COVID-19 impacted the target company’s supply chain?
  • Is the target company able to manufacture goods and provide services after an impact on its supply chain?
  • If the product or service delivery is impacted, has the target company sourced alternative suppliers or providers?
  • Has the pandemic increased operational or other related costs (production)?

Protocols of Risk Management

Target companies should pay special attention to their business continuity plans. On the other hand, buyers should understand the target company’s crisis management procedures and strategies for navigating stressful times.


  • Are there significant operational changes in the target’s business due to COVID-19?
  • What major decisions have been taken to manage the current crisis?
  • Is there any impact on the business’ operational costs?
  • Is the target business prepared for future waves of pandemics?
  • Has the target business updated or revised its business plan to manage the situation successfully?

Debt Commitments

  • Can the target company comply with the warranties, covenants, and representations in its existing arrangements with lenders?
  • Has there been a default or notification requirement in the current facility agreements?
  • Are there any new amendments to lender agreements?


Since the pandemic began, governments scrambled to enact a series of employment law reforms, both temporary and permanent, such as paid sick leave extensions. The rapid evolution of employment laws addresses new issues, and businesses have likewise adapted their policies.

Buyers should evaluate the target company’s legal compliance in terms of privacy policies, health and safety procedures, layoffs, and furlough provisions, as well as remote working policies and arrangements.


  • Check if the target company has complied with COVID-19 legislation relating to the health and safety of its employees.
  • Check the measures that the target company has put in place to address issues related to the safety of employees, including those working remotely.
  • Are there any issues with remote working? Is there any noticeable effect on third-party suppliers, service providers, and customers?
  • Are there any claims or complaints regarding noncompliance with a safe workplace?
  • What is the impact of remote work on the target’s business?
  • How many employees have been furloughed?
  • Are there many workforce disruptions like staff reduction or material changes in terms and conditions of employment?


A critical focus of investigative due diligence is the target company’s insurance contracts. Buyers should conduct a comprehensive review to flag any flaws, especially concerning health and disability coverage for employees. Review of the company’s unemployment insurance policies to assess any reductions in its workforce. Finding this out is essential as it could lead to additional financial obligations, such as a spike in unemployment claims that increase employer premiums.


  • Check revisions in insurance terms and conditions regarding costs, coverage, and renewability.
  • Are there any COVID-19 related claims?
  • Has the target company complied with the notice and other applicable requirements if a claim has been made?

Regulatory Approvals

Due to the reduced staffing of government agencies and other regulatory offices, COVID-19 can lead to a significant delay in securing regulatory approvals and other governmental filings. Lack of staff also creates a backlog of work that, in turn, increases delays in document processing.


  • Is the target company dependent on any type of government funding?
  • Is the target company claiming any tax incentive as a result of COVID-19?

Compliance with laws

  • Check whether the target company is complying with the laws, regulations, and guidelines pertinent to COVID-19.

COVID-19 imposed challenges upon and highlighted new areas of concern for both parties, including an inability to physically access documents and data or travel to the seller’s business site(s). For M&A deals during the pandemic, both buyers and sellers should assess, apportion, and evaluate risk properly to their mutual satisfaction.

In the case of distressed companies, comprehensive due diligence is even more critical for M&A or investments, as recovery under indemnification provisions after the transaction may be especially difficult.

Address the Challenges

Since the easing of lockdowns, M&A deals are gradually picking up. At such a critical time, businesses should try to address the issues and other aspects of due diligence imposed by the pandemic, such as former low-risk issues like the security of the supply chain and events now impacted by the termination of material contracts.

While technology is not an ideal substitute for on-site physical inspection, buyers can ascertain some risks with drone technology, Google Earth, satellite images, and other similar technology. And where these tech solutions prove ineffective (difficulty accessing the business site from the air) or the inspection results give insufficient data, both parties can address issues through indemnification protection.

Due diligence sets the tone for negotiation and facilitates clear communication between the parties (pricing) and proper allotment of risks in the transaction documents.

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Makalyn Feaster

Makalyn Feaster

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