In my previous blog I spoke about the process a business can go through to achieve growth , concentrating on acquisitive growth (i.e. via acquisition or mergers).
With this I discussed the non-financial considerations that I recommend any business owner to address first, prior to an acquisition to ensure that the business case meets the aims and objectives of the buyer.
Only once these have been considered should the financial implications of such a transaction be deliberated. These can broadly fall into a number of simple questions which the buyer should look to answer before proceeding;
1. How much are you going to pay?
It is important to ensure that you pay a fair price in any acquisition, and I would always recommend having an independent valuation carried out by a valuation expert – in my experience being armed with a robust valuation will give you confidence in negotiating the price and helps ensure that the heart does not rule the head.
The valuation should consider amongst other things, what is the appropriate basis to value the business, is this based on net assets, maintainable profits or discounted future cash flows – each can have a very different bearing on the value.
2. How is the payment going to be structured?
Once you have agreed how much you are going to pay, you then need to consider how this payment will be structured. Will this be paid in full up-front, or will an element of the price be deferred based on contingent performance post acquisition (an Earn-out payment).
Understanding how the payment will be structured is vital as this will allow for a detailed cash-flow forecast to review the impact of the acquisition on the company finances.
A payment structure may also help to bridge the gap between the buyer and sellers throughout negotiations, where deferred payment based on an Earn-out can take into account the Sellers view of future growth. Note, I will be covering negotiations in more detail in a future blog.
3. How is the purchase going to be financed?
For both the buyer and seller it is important to consider how the proposed acquisition will be financed.
For the Seller, it is important to know whether the buyer will be reliant on external funding as this may alter their view of a particular buyer when competing offers are received. It is not uncommon for transactions to fail due to unforeseen financing issues arising near the end of a transaction.
For a buyer, ensuring you have the ability to finance an acquisition is important not least to ensure you are able to complete the purchase, but also understanding the costs of finance and how these can be borne by either the target business or the existing business and what financial stress this may put these under.
4. Is there a need for further finance to be provided to the new acquisition?
You will need to contemplate whether in addition to the proposed acquisition there will be a requirement for additional capital to be injected into the target business. This may be to help integration between the existing and target business, or may be to fund growth plans or new capital equipment.
Understanding potential future increased financial requirements will help to ensure that a robust cash-flow projection can be created to project forward the cash position, and any relevant ‘pinch’ points so these can then be managed effectively.
5. What is the return that will be achieved on the acquisition?
Finally, it is also imperative not to lose sight of the fact that the proposed acquisition for the buyer should lead to increased profitability and a return on the investment in the new business. Careful plotting of potential future profits will help to consider whether a particular acquisition appropriately reflects the risks and rewards of the transaction.
At Rickard Luckin our team of Corporate Finance specialists and Business Advisors are able to help guide you through each of the steps outlined, working closely with you and other professionals and financial lenders to help ensure that the financial aspects of an acquisition are carefully considered and understood so that there are no surprises before, during or after the transaction.
If you have any questions about the above, or would like more information specific to your circumstances, please enter your email address below and we will get in touch: