As any business grows and gains market share, acquiring other businesses to tuck in’ to an existing business or, in time, buying complementary assets, may help accelerate business expansion. Wise acquisitions can increase the wealth in any business but like any investment, there are risks involved.
Furthermore one of the major impediments to business owners receiving full value from their business is the “readiness” of the business or business asset to be sold. If the business or business asset is not “ready” to be sold then due diligence conducted by the prospective purchaser will inevitably find an impediment to the seller achieving maximum value or alternatively facing a “dealer killer” that may hinder a sale.
Acquirers or sellers of a business or a business asset will do well to understand the requirements of due diligence to obtain the “right price and terms”.
What follows is an overview of the issues facing acquirers of business’s or business assets or sellers of business’s or business assets that fail to understand the importance of good – due diligence.
Acquisition Due Diligence
The more prepared you are, the more due diligence you have completed, the more informed you are about your financing requirements and availability of financing, the better placed you are to complete the right deal’.
Purchasing a business needs momentum. Successful transactions require more than just two willing parties—buyer and seller. They require pressure to move a transaction forward and complete the transaction on your terms. Preparation and setting a timetable as an ‘acquirer’ on your terms will give you momentum.
In every acquisition a fundamental conflict exists between the buyer and seller. As the buyer, you want to pay as little as possible for the acquisition you are purchasing, while the seller wants to be paid as much as possible for their business. In order to overcome the conflict of price that inevitably arises in the process of negotiation, both parties must have enough desire to make the sale occur.
Your desire to do the right deal will be significantly enhanced if you are prepared and understand the process of due diligence. Otherwise the transaction simply won’t happen.
Desire is one thing — process is another. To get the ‘deal’ at the price you want to pay, on the terms you want, you need to conduct due diligence on your terms in an efficient, timely and cost effective manner.
It is equally important to really know what you’re getting into. If you don’t thoroughly understand what you’re buying and how to use it, you will either overpay or buy the wrong bolt on business or asset. The fit will not be right. Therefore be prepared to walk away and look for another deal.
Acquisition deals can happen quickly — or they can require time to complete. Do not compromise on due diligence. If financials or other requested documentation is not coming your way — walk away.
Divest Due Diligence
Deal killers and Impediments in respect to the maximisation of value in the event of a sale of a third party or a family member include:
Liabilities — either employment or environmentally related;
- Litigation or pending litigation;
- Taxation penalties or compliance problems;
- Product Warranty obligations or litigation; and
- Long term debt obligation.
Some of the above deal killers or other impediments may require years to resolve. Nevertheless in many instances many business owners mistakenly believe they can just put up their hands and sell the business with little effort. This may be true but it comes with a cost.
The cost being:
- Failure to achieve maximum price;
- Escalating accounting or legal fees to “urgently” rectify problems (if possible under extremely tight deadlines); and
- Failure to receive total consideration upfront with a possible earn out where total payments may not be paid for some time, if at all or at a reduced amount.
To avoid deal killer impediments the following may be needed:
- Ensure audited accounts and tax returns are available e before the sale process commences;
- Ensure the sale entity is tax and litigation problem free;
- Make the assets transferable by removing long term debts;
- Simplify Business structures; and
- Remove any Vendor tax impediments to sell the Business.
Acquisitions can be incredibly successful but they can also devastate your business. Acquisitions seldom go as smoothly as you anticipate. It’s safe to assume that issues you never expected will arise either during acquisition transfer or post transfer.
Maintain momentum to get the ‘deal’ over the line under your terms. As a start prepare your own due diligence process as either a seller or an acquirer.
The harder you work on the due diligence of the deal — the better it will be.