Top tips for companies planning an acquisition

Acquiring another company is one of the most common and effective ways to grow a business – but first-time buyers will need a helping hand. Here are ten questions you must ask yourself during the acquisition process, kindly provided by PKF accountants and business advisers.

Top 10 Acquisition Tips

1. Where’s your wish list?

The Board should set criteria for potential targets, e.g. minimum turnover or a similar sector.

2. Where are your tip-offs coming from?

Contacts of the Board and professional advisers (e.g. solicitors, accountants and banks) or a specialist agency are good starting points for finding a well-priced target. It’s best to buy off-market rather than through an auction process.

3. How will you know a potential hot target when you see it?

Your checklist of ideal qualities should include: an established track record; a strong management team; a well-spread customer base; good financial history; projections that make sense; a strong asset base and enterprise values.

4. Would you take them for a pint?

At any rate, you need to know if personal issues are going to upset things. Meet with the Board of each target as soon as possible. Many a deal has been scuppered by a personality clash.

5. Have you had your sums checked?

The value of the combined business should exceed the value of your existing business plus the price of the acquisition.

6. Who will pick up the costs if the deal aborts?

It’s not unreasonable to expect the vendor to pay a major percentage if the deal aborts due to material problems identified in the due diligence. Now is the time to look at confidentiality clauses and an exclusivity period.

7. Have you got your house in order?

Plan the integration, validate your synergy assumptions, compare the strengths and weaknesses of the new and existing business, and rethink the sales and marketing plan.

8. How will you structure the deal – shares or assets?

Buying the shares is simpler, as you purchase everything – assets and liabilities.

The vendor is likely to prefer this, as an individual can attract taper relief from the capital gain, and a corporate vendor can qualify for substantial shareholdings exemption.

However, if you buy the assets you can pick and choose what you want and don’t inherit liabilities.

There is likely to be some form of tax relief for some of the assets (possibly including goodwill), and the acquisition avoids financial assistance whitewash procedures.

9. The devil’s in the detail – do you know how to deal with legal and financial due diligence?

Legal due diligence covers things like the constitution of the target, employment matters, intellectual property rights and compliance with relevant legislation.

Cover any problems that emerge with warranties. Financial due diligence will offer an independent review of information provided by the vendor and the vendor’s advisers.

This will include: quality of historical earnings and maintainable profits; spread of customers and products; future prospects of the business; pension issues (e.g. any defined benefit arrangements); completeness of tax liabilities; balance sheet black holes (e.g. bad debts and incomplete creditors).

10. Are you playing safe?

Ensure the sale and purchase agreement contains warranties and indemnities, in case there has not been full disclosure. The agreement often contains pre-completion conditions (e.g. a tidying-up exercise or seeking shareholder consent).

The agreement should also contain restrictive covenants on the vendors. Ensure power of attorney is in place in case not all parties can be at final meetings.

Jeff Harris told us: “One mistake buyers can make is to assume that once they are a good way into the process that it’s inevitable and pulling out is too difficult. But when you have completed all the due diligence, stop and take stock. Do you still want to buy?

“Does the price need to be renegotiated? Objectivity grows more difficult, but more vital, the further along the process you are. Make sure the due diligence works for you. If you cannot get the answers you need on issues that are fundamental, be ready to walk away.”

Last updated: 23rd February, 2021

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