Avantisteam Claims: Is “The New Normal” in “The Ordinary Course of Business”? |... - Jonathan Cartu CPA Accounting Firm - Tax Accountants
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Avantisteam Claims: Is “The New Normal” in “The Ordinary Course of Business”? |…

Is “The New Normal” in “The Ordinary Course of Business”? |...

Avantisteam Claims: Is “The New Normal” in “The Ordinary Course of Business”? |…

In the midst of the COVID-19 pandemic, we’re repeatedly challenged by “the new normal,” and, as M&A advisors, we’ve wondered, “is ‘the new normal’ in ‘the ordinary course of business’”?

A few weeks ago we sent you an alert that included a tool to help sellers track how the COVID-19 pandemic has impacted and is impacting their businesses (2020 Is Hereby Incorporated by Reference). In that alert we focused on identifying and quantifying COVID-19 risks and liabilities so a seller would be in a better position to challenge a buyer’s claims that the COVID-19 pandemic required a reduction in purchase price based on generalized concerns about pandemic-related liabilities and losses. We believe sellers who devote time and effort to specifically identifying the impact of the pandemic on their businesses and aggressively prepare to counter buyers’ claims by pointing to specific facts and data related to COVID-19 will be in the best position to negotiate a higher value for their businesses than those sellers who choose to rely on generalized statements about COVID-19’s impacts and liabilities.

Now, we are turning our focus to buyers and considering a unique COVID-19-related challenge buyers will face during a transaction’s executory period as long as the pandemic and its impact last – specifically, how does the buyer want the target to operate between signing and closing?

Customarily, during the period between signing and closing, a buyer would expect the target to operate in the same manner in which it operated immediately prior to signing – “in the ordinary course of business.” With many businesses adapting, reducing and suspending operations in reaction to COVID-19, requiring a target to operate in the ordinary course of business as it had immediately prior to signing may not in fact be in line with a buyer’s expectations and assumptions underlying valuation. In this new environment, what will buyers’ expectations be about how targets should operate during the executory period? While a buyer may want a target to operate as it did immediately prior to the pandemic (the “old normal”), that may simply not be possible or practical. At the end of the day, our own experience tells us that a buyer’s underlying goal will likely be twofold: (1) steering the target to preserve value when so many businesses are continuing to lose value and (2) beginning to transition back to “normal” operations. We believe the best way to achieve these goals will be for the buyer to come to the negotiating table with its own judgements about the actions seller will be permitted to take, and the actions seller should be required to take, during the executory period. After completing its diligence and considering the seller’s proposed disclosures about the target that specifically identify all of the ways that COVID-19 has impacted the target’s business (See 2020 Is Hereby Incorporated by Reference), a buyer should carefully study customary executory period operational covenants in a market purchase agreement and make its own determinations about how to tailor exceptions to these operational covenants (and build in additional affirmative operational covenants) designed to preserve the value of the business it has agreed to purchase, reduce surprises in how the business responds to the impact of COVID-19 and, thereby, create a “new normal” for the target.

Just as we did with the representations and warranties in our earlier alert, set forth below are common executory period covenants and the issues we think buyers should consider to define their expectations for the operation of a target pending closing and, with the help of their advisors, craft appropriate exceptions to these covenants and negotiate new affirmative obligations for the target.


Carve-Outs to Consider

Properties and Assets Covenants

  • Maintenance of properties and assets
  • Sales and Dispositions of properties and assets
  • Mortgages and pledges of properties and assets
  • Are certain properties and assets not being used that should be disposed of or leased?
  • Are there maintenance costs and expenses that should be deferred?
  • Did the target purchase or lease assets to assist with changing operations (e.g. WFH orders) that it may not need on a going forward basis and that it may make sense to sell?
  • Under what circumstances would buyer expect (or encourage) the target to dispose of its properties and assets?
  • Should the target be permitted to refinance a mortgage?

Maintenance of books and records

  • Has the target adopted any emergency board procedures that it should rescind when possible?
  • Has the target complied with legal requirements for meetings and board and management actions, especially in light of logistical issues related to WFH orders?


  • Has the target made any one time accounting policy changes?
  • Has the target made any changes to its cash management practices?
  • Has the target been advised by its accountants on the treatment or categorization of certain expenses related to the pandemic or WFH orders?
  • Have performance or payment waivers or deferrals obtained or granted by the target been accounted for appropriately?
  • Has the target (or the seller) received a loan under the Paycheck Protection Program? If so, how have they accounted for the loan?


  • File or amend tax returns
  • Claim tax refunds
  • Make or change tax elections
  • Settle tax claims
  • Has the target claimed tax credits or made tax elections available under the Families First Coronavirus Response Act (the FFCRA) or the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act)?
  • Has the target deferred the payment of payroll taxes under the CARES Act?
  • Should the target be permitted to carryback net operating losses and claim a refund of previously paid taxes? If so, who gets the benefit of such refund?
  • Should the target be permitted to adopt and implement permanent teleworking policies that may impact its state tax nexus footprint, potentially changing its filing obligations and overall state and local tax exposure?
  • Consider specifically permitting the target to challenge ad valorem property tax assessments that do not reflect the downturn in valuation, whether via a “calamity” provision or otherwise.

Material Contracts

  • Compliance with contracts
  • New contracts
  • Amendments to contracts
  • Termination of contracts
  • Changes to payment terms or practices
  • Waivers
  • Changes to collection practices
  • Writing down A/R
  • Payment of A/P
  • Supply chain interruptions
  • Related party contracts
  • Are there categories of contracts that…



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