The biggest mistake buyers make definitely overpayment.     Buyers can get caught up in the thrill of the chase and end up overpaying and accepting less favourable terms than they should have.  In that frame of mind it can become only too easy to rationalise the risk factors and ignore the voices of caution.   What they need to be doing is to keep in mind that their goal is to make money and succeed financially over the long term.  To quote Henry Kravis of KKR “Any fool can buy a business. Celebrate when you sell it for a profit.”

The biggest mistake sellers make is failure to understand it’s a sales process.   If done correctly, the process alone can add big dollars to the sale price.   You can argue that the final price is a mix of the underlying enterprise value of the business, the grooming and packaging process, and then the process and negotiaton skills of the M&A adviser.   You need to find a good number of high-quality buyers and get them into true competition.   In short this is neither a part time nor “do it yourself” project.

Buying a business can be difficult enough, but that’s just the easy part. You’ll sleep in the bed you made. Many an acquisition has turned to nightmare because of mistakes made during the purchase. Don’t let it happen to you.   Here’s some thoughts from our M&A experiences of both buying businesses and company sales to help you avoid the key pitfalls.

Seller financing

Not only does seller financing help minimize the equity required, it provides ready and meaningful recourse in the event the seller breaches duties, obligation, representations or warranties. Try to get “right of offset.”

If you can purchase assets instead of shares

Buying shares can be more risky, and you will need to conduct some due diligence on tgeh company you’re buying.  Its easier if you can negotiate to only buy the aseest. Asset purchases also reduce taxes.   But of course its much less tax advantageous to the seller, and most sellers will insist on a share sale or a greater price to compensate.

Reasonable returns

If the business can’t safely pay, beginning on day one, a resasonable return to you and comfortably service your debt and equity financing then you’re paying too much.  Remember that the bank that's helping to fund your deal will want to see a detailed business plan, and to agree financial covenants that are robust before supporting you.    And if you're raising Private Equity finance they'll also want to scrutinise the returns profile closely.

A clear, actionable penalty for every seller promise

Seller promises are frankly meaningless if your agreement doesn’t have specific, clear, actionable and valuable recourse outlined for each.  Make sure you're corporate lawyer has this all covered in the Sale and Purchase Agreement.

Verify seller’s ownership and rights to sell

Don’t trust that the owner legally owns anything, especially intellectual rights like trademarks, trade names, web domains, websites, formulas, patents, copyrights, etc.

Ensure that the non-compete is enforceable

No matter how sick or old or ill or tired or incompetent the seller says he is, nor how far away he says he’s moving, get a non-compete that your competent lawyer says is enforceable.

Pay no more than can be comfortably serviced by proven, historical cash flow

By all means count up all the synergies and cost reductions you think you’ll enjoy post completion, but try to pay only for the profits that are historically stable and proven.

Get personal recourse for seller breaches

For each and every promise, get the seller to agree to be held personally liable for any breach.

New, valid, lease on key property

Don’t  assume that the landlord will renew the lease or keep the same terms. Get it in writing!

 List the three things that could put you out of business the fastest

And be prepared to answer the question: “When the worst happens, how will I survive?” Don’t accept, “it’s unlikely to occur,” as an answer. If it “could,” you better plan for it.

Much of this is  common sense, but its amazing how people push through acquisitions only to regret them afterwards – I can think of a few examples in Cambridge and around East Anglia where folk have got this wrong, but there are some really glaring corporate horror stories out there in the UK banking sector.  Royal Bank of Scotland, Lloyds Bank and Coop Bank probably all wish they’d not done the deal!   But if you take your time and work with an M&A adviser and corporate lawyer who will challenge you on all the key points – even if it means telling you not to do the deal, then you’ll be fine.