Pitfalls to avoid when purchasing a business

Buying a business is a very complex transaction and to the uninitiated there are a whole host of potential traps to fall into. Emotional issues can play a big part on both sides and it is no wonder that the best deal makers often are those who are able to leave their emotions at the door and as such may appear to be cold and ruthless. Essentially they are able to evaluate a deal purely on its merits. Experience is also vital and so here are some guidelines on some of the mistakes to avoid.

Paying too much
This can be called deal fever! Where the buyer is so determined to buy the business either because they do not want anyone else to have it or because they, by now, have spent so much time and money looking at it that, they feel, it's not worth turning back.

Start with a top price in mind and only increase that figure if you are very certain that it's worth the rise. It would be rare for a vendor to put a business up for sale and then during the deal the buyer, rather than the seller, identifies a reason why the business is worth a lot more. The only time this might happen is where a deal has taken so long to come to fruition, and in the meantime the value of the market has increased rapidly, and the vendor hasn't noticed this! As you can see, this is unlikely to happen.

Post deal cultural integration
More than half of all deals fail to add value to the acquirer for a multitude of reasons but more often than not this is because they have not planned a properly managed integration of two major cultural factors - people and systems.

The best companies have mixed team integration task forces. For a small deal this may not be practicable but do this planning before you complete the deal, not afterwards. Please read the Business Sale Report article entitled 'Post merger integration: company culture' - March 2007.

Synergistic surplus overkill
The Managing Director says, "If we put the two companies together we cut out £1m of costs in the first 6 months all to the bottom line!"

The truth is that often there will be no savings made in the first year. Entrepreneurs are naturally optimistic and expect to see acquisition value soon after the deal closes. Serial entrepreneurs know that savings take time and work.

Unworkable deal structure
It's tempting, in these debt scarce markets, to structure deals based on performance of the business post-acquisition (an earn-out). This is effectively "vendor finance" where the seller is accepting deferred consideration. The trouble is that these are fraught with complications in terms of monitoring requirements. If not ironed out properly at the negotiating table and scrutinised by the lawyer in the sale and purchase agreement, earn-outs can lead to post-deal debate and substantial costs to remove issues never properly considered by both parties, anxious to get the deal underway.

Unacceptable negotiating tactics
Whether it's brinkmanship or the taking of a condescending attitude towards a vendor which may initially bring in a more financially favourable deal, poor negotiating tactics often create bad feelings between the buyer and seller. This can lead to a willing seller walking away from a good deal in disgust.

The ideal purchase is where the buyer and seller both feel that a good deal is being transacted. Hopefully more concessions can be won from the seller if they feel it is a good deal.

Letting your lawyer negotiate commercial issues

Never let a lawyer negotiate a commercial element of your deal. That is not what their role is and they were certainly not trained to do this. Their job is to protect what you agree and point out pitfalls, make sure they do that and only that!
Letting the real value of the business go after the sale

Nine times out of ten it's within the workforce of the business you are acquiring that the real value rests and not just in the balance sheet or the senior team. Though it is obvious that the senior staff should be considered, whether you use golden handcuffs or something more subtle, it is often further down the chain that corporate value can be lost as those loyal staff who have stayed in their jobs leave due to neglect.

This feature is based on an article by Jo Haigh. Jo Haigh is a Partner and Head of Corporate Finance for MGR a company based in London and Yorkshire ([email protected]) and a partner in the fds Group, a specialist training and development business ([email protected]).

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