6th September 2023Buying a business – Why seek advice early?
Buying a business is a big decision, whether it’s a first-time acquisition or part of an existing growth strategy. However, the journey from finding a target to closing the deal can be long and complicated and may take you away from running any existing business.
There is no simple map to guide you through that journey and no “one size fits all” advice, so once you find that target and take the first steps, you may want to consider bringing an advisor on board to help you through the complexities of reaching a deal and making sense of the legal and accounting speak that you are likely to be presented with.
Obtaining the right advice early on is the key to a smoother process. Early negotiations with the vendor will often set expectation levels on both sides, on matters such as valuation and timetable. Leaving advice towards the end of the deal, when all but the “t’s” are crossed, might result in disgruntled vendors, lengthy delays in completion or a complete breakdown of the transaction. Seeking no advice at all could cost you dearly post-acquisition if there are hidden problems.
- Valuation – This is where many deals fall apart because buyers and sellers often place very different values on the same business, and many factors can affect value. Initial Indicative valuations are key to a smooth purchase. Get it wrong at the start and you could face difficult conversations with the vendor further down the line if you realise you are paying too much.
- Heads of terms – When you reach an agreement with the seller regarding the basic price, structure, and terms of the transaction, you typically enter into ‘heads of terms’. This document sets out the price and basic terms and principles of the transaction. Although not binding, it will outline the contractual agreement; again, you may find it difficult to navigate away from these terms if you later find that they are not in your interest.
- Deal structure – Vendors will be looking for the most tax efficient extraction of their value, which is not always in the best interests of the buyer.
- Completion mechanism – Initial and final agreements will often involve arrangements around adjustments to the purchase price for assets and liabilities held at the time of completion (the “Completion Mechanism”). These can involve some complex accounting issues which, dependent upon the underlying financial of the target, could significantly impact what you might be paying for the business.
- Financial due diligence – Financial Due Diligence can not only highlight issues of concern around potential hidden liabilities, but it is also useful in the review of the quality of earnings – i.e., highlighting the impact of unusual items in the historical results that will not necessarily be repeated in the future, for example, loss of a key customer. This can be a useful tool in negotiating the final purchase price if normalised earnings are found to be lower than those reported by the target. It can also serve to highlight specific matters that should be indemnified by the vendor.
- Sale & Purchase Agreements (SPA) -The SPA will formalise all the previous ‘heads of terms’ discussed during the due diligence stage, alongside any changes that have been negotiated on the way. This agreement can act as your insurance policy, should anything untoward come to light post acquisition.
- Completion accounts – Once the deal is complete, the vendor will often produce completion accounts which will either increase or reduce the initial consideration paid.
All these hurdles can be navigated with a competent and experienced advisor by your side from day one. The HW Fisher Transaction Services team are experienced navigators. Our hands-on, partner-led approach will give you clarity around the key issues and the confidence you need to proceed with the transaction.