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.

What Does Maximum “Value” actually mean when selling a business?

When the time comes for business owners to think about selling their business it is usually one or, if not the, most valuable assets they possess.   And so it’s important that they get something truly valuable in return.   Typically, that’s money.   But most transactions have lots of other valuable features – so in company sales it’s not just about the money.

When a company owner hires an M&A adviser like PEM Corporate Finance to work with him or her on the sale of his/her business we are typically charged with helping to maximize value.  But not all business sellers appreciate fully that “value” can mean much more than money.   “Value” can of course be extracted in many forms other than cash, such as:

• Loan Notes
• Earn-out agreements
• Releases of liabilities, such as guarantees.
• Waiver of contingent liabilities
• Ongoing benefits, such as insurance coverage or use of a vehicle or premises
• Consultancy agreement for the Vendor
• Employment agreements for employees
• Agreement to lease certain real estate or other assets

In the sale preparation process, we work with Vendors to determine what they would enjoy or find value in.  Of course there’s no telling what a strategic buyer might be prepared to pay until we can get them into a competitive process, but its useful to prioritize before going into an auction.

For example:

1. Cash at closing
2. Long-term “market” lease of property that the Vendor owns personally or in his/her pension fund
3. Firm obligations to pay cash post-closing – i.e. deferred consideration rather than earn out.
4. Employment agreements for top 3 executives
5. Earn-out agreements
6. Release of contingent liabilities

This priorities list can then inform the negotiation, and it’s a useful expectations setting exercise ahead of the sale process. 

So “maximising value” relates to anything that is of value to the seller.  It will probably should be much more than cash because the buyers have a limited amount of cash they can provide at closing, and yet they usually have other “things of value” they can deliver if the negotiation is skilfully handled.  This is one reason why its better to have skilled experienced M&A/corporate fiannce advisors on your side rather than working with a brokerage which simply puts buyers and seller together and then leaves them to it.

I'm on stage with SIMADS production of Annie next week at the Burgess Hall in St Ives, playing Warbucks.    The show is on at the Burgess Hall in St Ives from Tuesday 23rd to Saturday 27th April.   The matinee is already sold out, but there are some tickets left for all the other performances.   Full details including the ability to book online are on SIMADS website - at www.simads.co.uk

Annie is a Broadway musical based upon a popular comic strip Little Orphan Annie (from which the title of this post derives) with music by Charles Strouse, lyrics by Martin Charnin, and the book by Thomas Meehan. The original Broadway production opened in 1977 and ran for nearly six years, setting a record for the Alvin Theatre.  It spawned numerous productions in many countries, as well as national tours, and won the Tony Award for Best Musical.  The musical's songs "Tomorrow" and "Hard-Knock Life" are among its most popular musical numbers.

Those who know the story might spot some resonances with today's economic troubles amongst the story of the 11 year old orphan.     The story takes place during the recession - and during one scene President Franklin Roosevelt holds a cabinet meeting.  Warbucks joins him along with Annie - who sings to him and inspires the "new deal".   Perhaps I should send a personal invitation to George Osborne?   If he can't make it perhaps he'd like to watch the video below as inspiration for his next budget?

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We think its more of an art than a science.    And this is borne out by legal precedent:

"in the field of valuation the experience of the valuer and his ability to form a sound commercial judgement is of overiding importance. The process of valuation cannot be reduced to the application of a set of abstract formulae..."

Justice Vinelott - High Court Case Re Cumana (1986)

I lead our business valuations activity, and as such I often get to see earlier attempts at valuing the company, or sometimes in a dispute the valuation prepared for the other side.  I'm always astonished at home little knowledge is shown of the business being valued.    Its like a surveyor valuing a house simply by driving past it at speed.   And companies are more complex to value.   I've also seen valuations where earnings multiples are simply plucked from the air, or derived from quite ludicrous comparatives.   And probably the worse offenders are the valuations that clearly suffer from "death by spreadsheet".  In other words lots of complicated, but meaningless, analysis.

We believe strongly that valuation reports should be useful, and if possible interesting to the company that commissions them.

If you're interested in learning a little about the factors that will influence the value of your business, why not come to one of our seminars where we cover the topic.  We're runing one in Norwich this week 14 March at Dunston Hall Hotel.   We're running them again in Cambridge at the Trinity Centre on 13 June, and in Borehamwood at the Holiday Inn on 20 June.  If you'd like to find out more about the program or to book visit our events page. 

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