Strategies for growth – part 2
14th June 2012
Following on from the first part of his article, Strategies for growth, Simon Jordan, corporate finance partner at the Thames Valley office of Crowe Clark Whitehill, the national, audit, tax and advisory firm, identifies the key stages of completing a transaction.
When a potential target has been identified, successfully approached and a broad agreement reached on the terms of the transaction, the first stage of any transaction is to agree the written terms in the so-called heads of agreement.
This document is prepared with your advisers. It sets out the terms of the proposed transaction, detailing the price and payment as well as the basis upon which this has been agreed, e.g. as a multiple of a prior year’s earnings. It will also outline the prospective timetable for completion and, once signed, provides a handy reference point for completing all the necessary paperwork.
From this point, deal completion is generally just three steps away with due diligence, the Share Purchase Agreement (SPA) and the integration plan. Your advisers will assist you with these aspects and project manage the task to completion.
Due diligence is a key stage of any transaction and, in most cases, it will involve legal and financial due diligence.
The objective of these processes is to confirm that the target is exactly what it claims to be as well as to offer a type of insurance policy should things not turn out as expected.
Legal due diligence typically involves examining contracts, employment matters, premise issues, litigation and other arrangements. Your legal advisers will issue a report dealing with these matters and identifying issues that will have to be dealt with pre-deal, such as updating employment contracts and dealing with change of
control issues in customer contracts.
Financial due diligence ensures that there are no financial black holes and that the business is trading as it should be. Again, this process may uncover issues that will need to be addressed, such as customer dependency, margin erosion or one-off sales distorting underlying trading, which can lead to price renegotiations.
Simultaneously, your legal advisers will prepare the SPA based on the heads of agreement. This will be signed by all parties, setting out the details of the transaction including price, what happens at completion and the warranties and indemnities that are committed to by the vendors. It will also outline details of how any deferred consideration will be calculated and paid as well as restrictive covenants to be entered into by the vendors.
Finally, with access to the target and its management, the acquirer can start addressing integration issues and drawing up a plan.
This may involve moving the target’s operations, removing duplicate functions, integrating systems or adopting a new marketing plan. It will also include how employees are notified of the merger.
Various issues will undoubtedly arise during the acquisition process and these are usually managed by your advisers and settled through negotiations. However, unless there are massive issues, which are typically identified towards the start of the process, the deal should complete – although do not be surprised if the timetable slips.
n For more advice on business acquisitions as a growth
strategy, please contact Simon Jordan at Crowe Clark Whitehill’s Thames Valley office on (0118) 959 7222, or at email@example.com