Peter Harkness (above) and his business partner, Owen Davies, bought Highbury Communications, the North London-based publisher of many well-known newsstand magazines out of administration in 2006. The businesses downfall occurred after it had taken on too much debt – some £26m. This debt was mainly due to some disastrous acquisitions and the overly ambitious launch of new media products.

How Peter Harkness and his partner turned the company around so that it is now making a profit of £1m is an interesting story. The main focus was to get rid of the loss making magazines and concentrate on the “special interest” magazines that have a more loyal subscriber base. Due to the increased profitability of these new titles only 30% of the revenue now comes from advertisers. Profitability was further increased with the setting up of ecommerce websites closely linked to the actual titles.

Another successful entrepreneur, Simon Elliot (above right), saw an opportunity when the company he was interested in collapsed due to a £1m tax bill. Problems that were uncovered included a finance director who had been stealing from the company due to lack of oversight. One of the main attractions of the company were the long term contracts.

Both Elliot and Harkness found their target companies through careful research. Harkness says he ‘used to spend hours and hours downloading files from Companies House’, and Elliot’s successful bid came after two previous potential mergers had fallen by the wayside. Of course another great source of information is the Business Sale Report, where companies that have gone into administration are listed on the site each day.

Stuart Wilde just just saw a business, liked it and just bought it. Stuart was in the middle of a home renovation project when he found out his favourite supplier had gone under. Stuart was relatively wealthy but at 52 he had ‘itchy feet’. He jumped at the chance to buy the company, even though he had no experience in bathrooms or in retail.
‘I did question my sanity for a couple of minutes,’ he says, ‘but I felt there was a good business there, and the main reason it had gone into administration was because the previous owners had spent £750,000 doing up the showroom without thinking about cashflow.’

So what have the entrepreneurs learnt from their experience. A number of key lessons seem to have been learnt.

A more detailed version of this article where readers can gain more insight can be found by subscribing to the Business Sale Report

The importance of due diligence to the success of a transaction is often underestimated. I thought it might be useful to put together a few pointers to keep in mind while running a due diligence exercise on a business you are intending to buy. It is not a checklist – there are a few good due diligence checklists around – there is a good booklet available to subscribers of the Business Sale Report entitled ‘Due Diligence – over 1000 Key Questions to Evaluate Any Business For Sale’. You can download an extract here.

Plan it, scope it
Define the scope of the due diligence exercise and clearly mark out who is doing what, when. Work to a timeline. Don’t waste time on areas that are not likely to cause any real issues or have any effect on the final sale agreement.

Employee issues
Thorough due diligence should pick up any issues, risks and potential liabilities relating to the seller’s employees. For instance, check if there are any past or present employees litigating against the business. Do any of the employment contracts have unusual clauses i.e. over-the-top redundancy packages? What are the specifics of the pension plans?

Move fast, top down
It is important to spot any issues early on so that the appropriate warranties and indemnities can be quickly put in place. Focus on major issues first. As with any aspect of due diligence, the late uncovering of issues which lead to changed warranties and indemnities at an advanced stage can reduce strength of the negotiating hand and, (i.e. in the case of pensions) in some cases, even scupper the deal.

Communication is vital
The flow of communication between the buyer and his/her solicitors is of paramount importance, for if they do not work closely together, the process can quite simply fail.
Buyers must communicate the key issues of concern to the solicitors; they should not just assume that all areas are of equal importance, and that everything will be dealt with in good time. The solicitor must be told what the key commercial reasons are for the purchase, which areas are high-risk and which areas should be prioritised.
Continually monitor the activity of the solicitors and accountants carrying out your diligence and make sure they are giving you regular feedback.

Don’t forget the culture
Funny how the lack of understanding of the target’s company culture is one of the main reasons for failed acquisitions, yet has been notoriously ignored in the due diligence process. Don’t make the same mistake. This is usually one for the purchaser’s management to consider, rather than delegating to legal or financial advisers. Map out the management styles of your business and the target business. Look at the core values of each and analyse the differences. How do the communication structures and styles differ? Look at the dispute policies.

Collect information, then analyse
Don’t let any of your advisers analyse whilst collecting the information. These are two distinct activities within the due diligence process. First find out where the required information is, then collect the information, recording its source and noting whether it is fact or hearsay. Then start an objective analysis.

Don’t panic, take your time
A focused but comprehensive approach is better than taking shortcuts in order to reduce costs. Often the buyer discovers that ‘thin areas’ of diligence need to be covered again in more detail. It will end up taking more time overall and costing more money.