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P&J the business: Both sides must take methodical approach to M&A

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Acquirers these days are more likely to take a qualitative approach than a quantitative one.

They want deals that will deliver value over the long term, and are willing to look past the short-term havoc caused by coronavirus and Brexit.

A more focused M&A strategy and level of diligence, therefore, comes into play – but there are many possible pitfalls for companies.

An acquisition can swiftly become an expensive and fruitless process if preparation and clear objectives are lacking at the outset.

Early engagement with professional advisers in terms of legal, tax and financial input – in addition to robust commercial analysis in the boardroom – is essential.

After a possible acquisition has been identified, the bones of any deal should be committed to writing in a heads-of-terms document which will serve as a roadmap for the legally binding contracts to follow.

More time spent here thrashing out detail can often save time and ensure everyone truly is “on the same page” regarding the terms of the transaction.

Legally binding exclusivity for the prospective buyer is key – without that, the likely significant investment in professional fees and management time and energy could be wasted.

Discussions

Also, discussions with potential deal funders should progress from inception of the project.

Organising funding takes time, even though committed terms will not materialise until much further on in the process.

At the heart of any deal is the due diligence exercise, which is the buyer’s detailed investigation of the target business, “warts and all”.

The nature of the target business will dictate the key areas of due diligence interest. Typically high on the agenda will be the likes of corporate structure, the nature and ownership of intellectual property rights, the terms and conditions of key employees, key contracts, occupation or ownership of business premises, any litigation or claims, environmental matters, pension obligations and statutory compliance.

Acquirers will also wish to investigate issues related to Covid-19, such as compliance with regulations, use of the Coronavirus Job Retention Scheme and/or the Coronavirus Business Interruption Loan Scheme, and generally the deferral of liabilities such as rent or tax. On completion of satisfactory due diligence, the parties will move to the negotiation of legally binding transaction documents.

Warranties and indemnities

A buyer will wish to ensure they have the benefit of suitable warranties and indemnities to support the acquisition price.

Careful consideration should be given to the extent of non-compete and non-dealing/solicitation provisions on the vendor and to what extent key employees in the target business are tied in.

Anyone considering an acquisition should perhaps bear in mind the legal principle “caveat emptor” – let the buyer beware. But robust early analysis, planning and professional advice will greatly assist a new owner to navigate the M&A course safely.

From a seller’s perspective, the first hurdle for an owner-managed business tends to be the emotional one. This is natural but for those with strong ties it can lead to a tendency to do nothing – which is the worst course of action.

As always, engaging professional advisers at an early stage is crucial.

Valuation and structure

A disposal may take several forms. It could be part of succession planning within a family, a management buy-out or a business being exposed to the market for sale.

Due consideration should be given as to what is most likely to meet the vendor’s objectives but, in each case, the valuation and structure of the deal is key – as is tax advice.

Suitable non-disclosure agreements should be put in place before any discussions start or information is shared with potential buyers.

Once the due diligence process is up and running, momentum is key – and from a seller’s perspective being able to provide accurate information promptly is imperative.

Advisers have all seen “deal fatigue” set in – as a rule the longer the sale process runs, the higher the chance of something going wrong.

Proactive management of the transaction is a necessity.

Negotiation of the legally binding transaction documents will put the flesh on the bones of the heads of terms and it’s fair to say “the devil is always in the detail”.

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