Article by Tracy Hickman STAPLES RODWAY AUCKLAND email@example.com
It’s easy to be swept along by the momentum when you are buying a business. You’ve agreed terms, it appears to be a great deal, and now you just want it to happen! We highlight here a couple of examples where our assistance with the due diligence process helped our clients to make the right decision.
NDERTAKING THOROUGH DUE DILIGENCE IS an important step
before committing yourself, and you should be prepared to renegotiate or walk away if the findings are less than ideal.
ate a lower price and make the changes to the business themselves. However, given our client’s inexperience in the sector, walking away at this time was the best option for her.
CASE STUDY ONE: STEP BY STEP...
CASE STUDY TWO: INSIDE KNOWLEDGE…
BACKGROUND: We were recently approached by a client who was looking at a lifestyle change, moving from a corporate environment to being her own boss. Having found a ‘solid business’, and after months of negotiations on price, her lawyer recommended that she approach us to help with due diligence before going unconditional on the deal.
BACKGROUND: Our client had been a customer of the business being sold for many years, and had agreed a deal with the vendor to buy the assets of his business, with the final price payable being subject to adjustment following our due diligence.
PROCESS: We explained that what constitutes a ‘due diligence’ exercise can vary depending on the structure of the deal. In this instance, the agreement was to purchase shares in the business, so our client would have been liable for any pre-existing liabilities, including tax, so a detailed check on all tax types was required. Our due diligence would also have involved reviewing the historical financial statements, and any forecasts, a thorough check on the inventory, reviewing the fixed asset register, employee contracts and lease details. Also we would have reviewed customer contracts, borrowings, and the lists of aged debtors and creditors. However, we didn’t get that far! Early conversations with our client revealed that significant bank lending would be required to fund the purchase, and if it wasn’t feasible for the banks to lend, given her circumstances, then there would be no point incurring the extra cost of the due diligence. So as a starting point we obtained the financial statements for the business, and worked with our client on preparing a financial model to forecast the cash flows in the business over the next three years, and calculate the funding requirements. Our forecast quickly demonstrated that the expected free cash flows were considerably less than the latest financial statements provided by the vendor. We advised our client to go through our assumptions with the vendor, upon which it transpired that a number of ‘adjustments’ had been made to the financial statements, that the business had recently experienced a downturn and some changes would need to be made to achieve historical earnings. OUTCOME: The vendor did not want to reduce the asking price for the business, and he believed that he could turn the business around in a few months, so both parties agreed to put the deal on hold and review again in six months. It could have been a good opportunity for an experienced operator to negoti-
PROCESS: Given the longstanding relationship between the vendor and purchaser, it was important to obtain an independent perspective on the business, removing emotion from the deal. Staples Rodway undertook a detailed due diligence, checking the inventory, assets, historical and forecast financial statements, aging of the debtors and review of forward contracts. We also reviewed employee contracts and property leases. We dealt directly with the vendor’s financial controller, with both the vendor and purchaser stepping back from the transaction. A report summarising our findings recommended a number of amendments to the purchase price, for obsolete stock and doubtful debts. We also highlighted a number of issues with pending lease renewals. OUTCOME: The purchase price was considerably reduced on the basis of our findings, with our client negotiating a better deal. Given our detailed understanding of the target business, we were also able to provide advice on the tax treatment of the transaction and make amendments to the Sale and Purchase Agreement which allowed both parties to make savings. Due diligence is not simply a ‘tick the box’ exercise. It involves working with the purchaser to understand how the transaction is going to affect them, and looking at the detail with that in mind. We may be helping to determine if a business is viable, or looking for areas to support a reduction in purchase price. Our overriding intention is to procure the best outcome for our clients, even if that means not going ahead with the deal. If you need any help with due diligence, whether as a potential purchaser, or as a vendor preparing for a sale, feel free to contact Tracy Hickman on 09 373 1133 or firstname.lastname@example.org, or contact your usual advisor.
NUMBERS Autumn 2015 • 9
Published on Aug 21, 2015
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