by Barrie Pearson - Wednesday, 29th August 2007 -

You have identified the target and begun amicable negotiations. Then what?

Confidence is high. Your professional advisers have been signed up; the lawyers’ and accountants’ meters are running.

What you have omitted to do is draw up an exclusivity agreement with your target or establish a firm timetable (and equally binding deadline) for the acquisition.

As a result, by the time you have presented your offer, the target company has sent full details of the plans to three listed companies. It says, simply, that if any of them can bring an improved offer to the table the company will be theirs instead.

Result: you are gazumped.

That’s several months of senior managers’ time and hefty abortive professional fees.

So always insist on an exclusivity agreement with your target prior to entry into the costly and time-consuming (but essential) due diligence process.

Second, if you are a private company, be extremely wary about attempting to compete on price with a quoted company. They have an armoury of financial weapons on their side that you don’t have – not least the capacity to use their own shares to pay for goodwill.

Yet, perhaps surprisingly, a company that’s up for sale will not automatically gravitate towards the highest bidder. That’s especially true for the smaller deal.

Another critical aspect for first-time acquirers is to make a full and very detailed analysis of the cultural implications in terms of human resources.

Buyers should recognise the importance of the cutting edge which owner-managers tend to have in private companies. That means they should be very wary of paying substantial amounts of goodwill when they are buying a private company. When the original owners are no longer hungry for continued profit growth, the business tends to suffer. What to do?

Incorporate some form of golden handcuff agreement into the original negotiations; defer some of the purchase consideration, for example, and make it contingent on an increase in profits over the coming two or three years.

It may seem a lengthy and costly exercise with an excess of paper-pushing, but due diligence is the sine qua non for any acquirer. However well you may think you know your target company – and you may have been playing golf with their managing director for years – do not take on trust anything that a vendor may say about his or her reputation in the marketplace or their forecasts for production costs and selling prices.

If anything is guaranteed to make a first-time acquisition fail, says one adviser, it is in cases in which the vendor has been taken on trust.

It is also one of the most difficult areas in which to get recompense through the courts. In those cases there will always be two clear winners: the lawyers working for either party.

Remember that due diligence – think of it as your insurance policy – stretches beyond number-crunching. Watch out for a target’s environmental record. The vendor might have wriggled off a massive financial and legal hook; you can be walking blithely into a disaster.

The real problem for the tyro purchaser is working out the extent to which you need to listen to (and heed) all the advice that is thrown your way.

Before you start...

Do you really need to acquire? You could consider setting up an alliance with an appropriate partner.

What’s an acquisition going to cost you? What would you do with the money if you were to invest it by growing organically?

Should you be selling rather than buying? It may just be that in your industry it’s time to get out rather than grow.

Have you done your homework? Impulse purchasing usually ends in tears. There’s a lot of background research that can be done. Analyse your target’s returns to Companies House; take a customer out for a nice, confidential lunch. But find out whether the acquisition will work.

How will the process work? Someone will have to mind the shop when you are stuck in endless meetings with advisers.

Do know just how much you can afford to pay? If you don’t, decide now.

Do you know what you are buying? Figure out whether this is a share or an asset deal.

Are there tax advantages? Just as important, ask yourself whether there are disadvantages. And have you talked to your tax advisers before setting things in motion?

First published in April 1997 - and just as true today.