05 Jul 2008

Doing the right deal

Corporate Finance, Insights, Publications

Despite the credit crunch there is a lot of cash out there.  Since investors and lenders were extremely cautious with their money after the losses made in the late nineties and later there is a large pile of un-invested cash, which investors are anxious to invest.  Until recently it was still possible to leverage deals so that virtually the whole cost of acquiring a company was borrowed from a bank with a sizeable proportion of the debt unsecured.  This has of course changed since the credit crunch but banks still have targets to meet.  The banks will only survive by making loans available, so they are still backing good deals.
Of course there are many different reasons to make acquisitions, including buying out competitors, diversifying into new areas, increasing market share, moving into new locations, creating a vertical market and simply growing profits through acquisition.  But what happens once you’ve decided to buy a business?  How can you be sure you’re not doing a bad deal?

Due Diligence

Due diligence is the process of studying a prospective acquisition target for any potential liabilities and to reduce the other risks associated with a purchase.  Due diligence involves an analysis of the commercial, financial, tax and legal position of the target business.  Depending on the circumstances and the business of the target, it may also involve a detailed analysis of other areas including environmental, property, technology, intellectual property, employment, pensions and cultural issues.

Due diligence is often performed by a number of parties, principally the acquirer, their accountants and lawyers.  Where necessary, other specialists in certain areas, such as surveyors, actuaries or environmental consultants, may be called upon, each to analyse the risks inherent to the buyer in their own area of expertise.

What do you do with a due diligence report?

It is a well-cited statistic that up to 80% of business acquisitions fail in that they don’t increase or maintain shareholder value.  One of the main reasons for failures of business acquisitions is the lack of planning of post-transaction integration.  The due diligence process should be used to further evaluate the strengths, weaknesses, risks and opportunities of the target business and form part of the future business planning process.  This can make the due diligence process very cost-effective in not only confirming that a particular acquisition is sound but also in helping to achieve value growth post-acquisition.

If due diligence highlights negative findings these can also be used to mitigate risk through warranties and indemnities in the legal contract, or perhaps even to renegotiate the purchase price downwards.  If negative issues can’t be managed then serious consideration should be made to aborting the proposed deal – we do if necessary, recommend clients to walk away from deals where the risks are too great.  Sometimes this is very valuable advice.

How to find a potential acquisition

We would be happy to discuss with you, in more detail, all the steps involved in an acquisition.  We can plan and manage the acquisition process for you and advise you on structuring a deal, taking tax and other considerations into account.  We have extensive databases of businesses for sale and would be happy to search for potential targets for you.

Once we have identified a suitable target we would be happy to approach the owners and negotiate a deal on your behalf, arrange the financing, conduct the financial due diligence and project manage the acquisition so as to ensure a smooth completion and successful post completion integration.

For more information about how we can help you, please contact us.