Buying a Business In association with Grant Thornton

THE TAKEOVER

Michael Neary, Corporate Finance Director, Grant Thornton

Michael Neary outlines some important steps when buying a business.

Acquiring a business is an exciting opportunity that does not come along often. Unfortunately it can be an intricate process and any mistakes involved can be costly ones. Once the decision to buy a business has been made, the most important thing is to avoid mistakes and to take the process one step at a time. Consider the following steps.

SET A STRATEGY

The first step in the process is to establish the why and how of your acquisition. The acquisition strategy must combine your long-term strategic objectives with the day-today realities of the purchase. Clear criteria must be established to focus your search and evaluate potential
targets against. Emotional decisions or decisions based on gut feelings or hunches have no place in your acquisition strategy.

IDENTIFY TARGETS

After this, identify suitable targets, the search for which can be a very time consuming and sensitive period of your acquisition. Displaying too much interest in the initial stages may end up increasing the price of your acquisition. Professional business advisors with detailed knowledge of the market can assist you in finding the perfect target company.

BEGIN DISCUSSIONS

Potential targets must be measured carefully against your already established criteria. Targets that meet or exceed your criteria should be approached on a confidential basis to gauge their interest in your approach and investigate whether or not they are willing to enter into serious negotiations with you.

TARGETS VALUE

As a general rule, a company's value is equal to the present value of its potential future cash flow streams, which have been discounted at the required rate of return. As the above guide has many caveats, it is best to use the skills of a corporate finance advisor. This will help you understand what the target company is really worth and provide a quantification of likely synergies that will result from the purchase.

SECURE FINANCING

While there are several funding options available, it is vitally important to choose the most appropriate funding. Put simply, longterm debt should be used to finance long-term ventures. Possible sources range from domestic banks and venture capital companies right through to governmental development agencies.

Applying to multiple sources will minimise wasted time and allow you to comparison shop for the most suitable terms.

Both long and short-term implications need to be considered when choosing finance as it may seriously impact the viability of your future plans.

DUE DILIGENCE

Due diligence should be conducted by professionals. This is done through reviews of the target company's financial information and onsite visits. It has been said that information is power and the information provided by a due diligence review will ensure that you get what you are paying for and help you to avoid any unwelcome surprises. The process should guide your decision making by presenting valuable insights into the target company and providing advance warning on potential risk issues.

Issues arising from the due diligence review can affect your prior valuation of the target and should be used as an estimate of the value at which an acquisition should be undertaken. It also identifies warranties and indemnities that should be obtained from the seller as part of the deal.

AGREE STRUCTURE AND CLOSE THE DEAL

At this stage you will have decided whether or not the acquisition fits in with your long-term objectives, sourced suitable financing and be aware of any risks and issues associated with the target company. Now the structure of the deal must be negotiated. Determining and negotiating the most suitable structure for the deal, with special emphasis on the timing and form of consideration, is critical to future success. When structuring the deal, be wary of any future tax consequences that will arise.

AFTERWARDS

Having followed all the previous steps will have ensured that you have made a good deal and maximised your chance for future success. But do not rest on your laurels. Without a proper strategy for the post-acquisition phase, a good start can quickly go bad. By arming yourself with a sound postacquisition plan, and implementing and managing it effectively, you will lay the groundwork for the future and continued success of your new acquisition.

It is your advisor's role to assist in making the deal run as smoothly as possible. However, keep your strategies and objectives in mind at all times. Know what issues were uncovered during due diligence. Buying a business may be a once-in-alifetime event and it makes sense to do it right.