Buying a business is a lengthy and complicated process. You've identified the right business for sale, approached the seller, researched the company and finally your offer is on the table. However there is still a lot of work to be done before the deal is completed. The vendor is likely to come back to you with amendments and counter proposals that will need to be agreed upon before the sale can go through, you will need to conduct due diligence on the business and there is also your post-acquisition strategy to consider. This article is a brief guide to the final stages of buying a company.
Negotiating with the seller
In some cases, an offer for a company may be accepted (or rejected) outright, but in the majority of instances, there will be key areas of disagreement that can be resolved through negotiation between buyer and seller. If you find yourself in this situation, enter into any discussions with clear parameters and goals so you know what you want to get out of the process. This will allow you to set the tone and pace of the negotiations, and will make it easier to see when you are deviating from these goals. Stick to your major objectives: a good negotiator wins the important issues, allows the other party to win the minor ones and tries to find creative solutions where both sides will gain. However, if things don't go to plan and you are unable to satisfy the objectives you have set, don't be afraid to back out - pressing ahead with an unsuitable deal will prove far more costly in the long run than the time and money you have invested thus far.
Heads of Agreement
Once both parties have reached agreement over the initial offer, the next stage is to draw up 'Heads of Agreement' (sometimes referred to as a 'letter of intent'), a non-binding document outlining the key agreements for the transaction in commercial language. This will be used by lawyers and any other advisers involved in the legal aspects of the deal, and is also the point of reference for final negotiations following the due diligence period.
Included in the heads of agreement should be an agreed period of exclusivity, during which the seller pledges not to enter into any discussions with other purchasers while you undertake due diligence. The usual length of an exclusivity period is around six to eight weeks.
After signing Heads of Agreement, the seller will grant you access to perform due diligence on the company to be acquired. This is your opportunity to fully explore every aspect of the business, in order to confirm all the facts and figures of the company on which the deal has been based so far and uncover any flaws or problems not revealed by the vendor that could affect the price agreed or the way the deal is structured. Thorough due diligence is essential to the success of a merger or acquisition, and should include a comprehensive review of the following areas of the business:
Financial and commercial performance (past, present and future)
Financial and management controls
Legal structure and issues
Tax and pensions
Assets and property
Environmental compliance and past usage
This list is by no means exhaustive for more information, and for a more detailed overview, see the Business Sale Report's online resource: Due Diligence: 1000 questions to ask
Unless you are a purchaser with extensive in-house resources who have experience of the particular sector and type of company you are acquiring, it is prudent to hire specialist advisers to assist in specific areas of due diligence or even manage the process. When hiring advisers, ensure that you choose a strong, professional team who understand your objectives and have worked on similar acquisitions to yours in the past. Remember that you are likely to need several different firms of advisers to work on the different parts of the business - when building your team, keep in mind how these parts will work together, and make sure that the entire process is overseen by strong management.
Negotiations that carry a significant "unknown" element for both parties, and there are many pitfalls that can lead to disaster if the terms of the deal are poorly set out.
Stages of due diligence
As a general rule, the process should begin with accounting and financial due diligence, during which your lawyers will produce an initial draft of the Share Purchase and Sale Agreement. It is in your interest if this can be drawn up after the initial investigations have been made, as it can then be more specific. However, be prepared that the vendor may not allow you to commence due diligence until this document is received, in order to deal with any potential deal breakers before the sale progresses. It is also worth bearing in mind that the areas of tax and pensions can often be the most cumbersome and drag out the due diligence process, so avoid leaving these until the last minute.
Once due diligence is complete, there are likely to be further issues to resolve, and you may even wish to re-open negotiations to review the key terms of the deal in the light of what has been uncovered. This is perfectly acceptable, however ensure that you have valid reasons to do so and avoid the temptation to exploit the information you now have to extract a more favourable deal - you run the risk of the vendor withdrawing completely, leaving you with the bill for what has been an expensive, time-consuming and now futile exercise. As a guide, the time between the signing of Heads of Agreement and final completion will take at least six weeks, and if extensive renegotiation has to take place following due diligence, this will certainly increase.
After the acquisition
The way in which the new company will be managed (or integrated, if it is to be merged with your existing company) should be considered right from the initial stages of the deal, and a detailed plan outlining the way in which this will take place should be prepared at the same time as due diligence work is carried out. The way in which the handover is managed can mean the difference between success and failure for a merger or acquisition, so it is essential that this is conducted carefully from day one.
See also: The due diligence process
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