Given the current strength of the economy, growth through acquisition is becoming a viable option for small and medium-sized Irish businesses. Ireland’s merger market is showing huge signs of improvement as reported in William Fry’s mid-year 2018 M&A review. The review outlined that there were 76 deals worth €70.9bn completed in the first half of 2018.
The benefits of buying an existing business are manifold. Buyers can benefit from acquiring a well-known brand, a strong customer or client base, an established supply network, key management team, critical licences or a strong physical location.
However, whilst buying an established business is considered to be less risky than starting your own business, it does not come without several risks. We would always advise our clients to enter any negotiation with their eyes open, their homework done and an attitude of “buyer beware”.
Below we outline a number of factors for buyers to consider which can help reduce the risks when acquiring a business and ensure you receive value for money on your investment.
Target the right business for you
Many people make the mistake of buying the wrong business. It is vital to buy a business that is the right fit for your skillset, experience or one that fits with your existing business.
There is a common misconception that if an owner decides to sell, there must be something wrong with the business. In reality businesses are sold for a number reasons including owner’s age profile, health reasons, divesting of non-core operations, a requirement for increased investment in the business or possibly a personal financial shock can place the business in distress if not sold.
If your own research has not found yielded results then consider asking an advisor to help identify viable targets. They have connections with other advisors who might have suitable targets or often know of companies for sale which are off-market. Advisors can also help pre-screen and carry out research on a company before approaching them.
An independent assessment or business valuation should be carried out to establish the future potential of the business, what the target business is worth and how much you are willing to pay.
Factors such as client retention and whether the business has recurring revenues can have a significant impact the business valuation, so it is important to explore beyond the basic financials.
We would advise that an accountant evaluate the financials of the business very carefully to make sure the historical financial performance represents a true reflection and correlates to the price being asked.
According to industry data, businesses typically sell for between 15 percent and 25 percent below the seller’s initial asking price. So ensure you have considered all relevant factors carefully before submitted a bid and agreeing commercial terms.
Heads of Terms
It is imperative to focus on the Heads of Terms as it sets out the price and commercial terms and ultimately forms an important part of the final agreements.
This is a buyer’s opportunity to set out their position. Don’t forget that the seller’s initial asking price is just a starting point for negotiation. The Heads of Terms will help bring focus to the negotiations and “flush out” any misunderstandings at an early stage.
Commercial and legal advice should be sought in preparing this key document as advisors will highlight issues that had not previously been considered.
Do your due diligence
Due diligence is essential to develop a full understanding of the business you are acquiring and to identify any potential risks that might leave you exposed. A business that looks great at first glance could have a number of issues.
Due diligence will help in identifying the warranties necessary to protect the purchaser against any future liabilities. This could include possible problems in relation to employees, titles to property, insurance and banking facilities.
Depending on the size and complexity of the target business the following due diligence should be carried out:
Depending on the outcome of the due diligence a buyer might want to renegotiate the price or adjust the timing of the payment of the full consideration.
Careful tax planning is a key element in buying a business and should be carried out at an early stage in the process. It is crucial that you choose the correct structure to allow you to scale the business without incurring significant costs. Different structures will have their pros and cons and can have a significant impact on the tax liabilities a buyer could face.
For example – whether the sale of the business should be an asset purchase or a share purchase. Picking the correct structure will enable the new business to maximise growth and minimise tax liabilities.
A good time to secure finance for a purchase is when the sector that business operates in is in a growth phase. A strong business & integration plan will assist in securing the funding you require.
Consideration needs to be given to the cashflow available within the existing business and what funds it can commit to avoid over leveraging. Future working capital and CapEx requirements should be considered before making the offer. The cost of the purchase including professional fees also needs to be factored into the funding commitment needed.
Bank and alternative senior debt lenders are unlikely to lend 100% of the funding required. As a result, you may need to turn to a private equity partner to narrow the funding gap. Each financing source comes with its own pros and cons, so do your research and talk to an advisor to make sure the funding source you choose is the best for your bottom line.
Integration and managing the change
Many mergers and acquisitions fail because of poor handling of change management and a lack of effective integration.
Company culture plays a major role in whether an acquisition will be a success or a failure. For the business being acquired, there may be a resistance to change or towards the new owner from existing staff.
Communication is critical. As soon as possible take the time to meet with key staff to understand the roles they play and how the business operates day-to-day. Maintain a focus on your key strategic objectives and your development plan and bring key employees with you on that journey to ensure early buy-in and efficient implementation.
When looking at buying a business, an external advisor can bring a lot of added value and help protect and maximise your investment. Our corporate finance team has extensive experience assisting clients in buying businesses and providing guidance through the different steps of the process. If you are considering investing or acquiring a business, contact a member of our corporate finance team.