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Simple but essential steps to minimise risk and maximise potential when looking to acquire a new business.
5 top tips when acquiring a business / company:
1. Understand why the business/company is being sold
Is there a logical explanation for why the business/company is being sold? For example, is the owner retiring, or do they know something about the industry which is making them want to quit whilst they are ahead?
2. Pay attention to the detail in the Heads of Terms
The Heads of Terms will provide the outline agreement for the basic terms of the deal and a focus for the negotiation process and will help to avoid future misunderstandings between the parties.
Although the Heads of Terms are ‘subject to contract’ they can include important legally binding provisions such as split of legal costs, exclusivity, and confidentiality clauses. If any crucial aspects of the deal terms are not clear or not set out in the Heads of Terms, there is increased potential for the deal to be derailed later.
Clear and detailed Heads of Terms can go a long way to avoiding unnecessary future professional and other costs.
3. Carry out thorough Due Diligence
Financial due diligence (DD) will help you to understand exactly what you are buying, the profitability of the business, and highlight potential financial risks such as future cash flow issues and liabilities.
Specific areas of financial DD can also be used to help negotiate the purchase price of the business, for example if the company has a large amount of historic debtors, some of which may be irrecoverable, these should be discounted to reflect the likelihood of you receiving this cash in the future.
Legal DD will help to confirm the ownership of assets being acquired, such as intellectual property, leases and staff.
Equally important, it will highlight any contractual obligations the company has which you will be legally responsible for in the future. Has the company committed to guarantee rent on behalf of another entity which you may later become liable for? Has a large capital commitment been made to purchase machinery which you may not require?
4. Be clear on the Legal terms especially Warranties and Indemnities
Ensure warranties and indemnities are in place to minimise your exposure to the risk of future claims. Although these may not be obvious at the time of purchase, there are many areas which can result in future financial loss to the company. For example, legal disputes, tax issues and contracts. If warranties and indemnities are not available, consider obtaining warranty and indemnity insurance.
If there are known risks such as an ongoing employee dispute, specific indemnities can be used to allocate this risk to the seller.
5. Delegate work clearly between your solicitors and financial advisors
Ensure the right people are doing the right thing. Paying both solicitors and financial advisors to cover all areas could significantly increase costs and is unlikely to add value.