After what has likely been many months of research, discussion and negotiation, it is finally time to dot the ‘i’s and cross the ‘t’s of your acquisition.
The final countdown to completion has begun, and for many, it is an exciting position in which to be – you are just a few final steps away from owning your new business venture!
Everyone hopes for smooth sailing in these last phases of an acquisition. But what happens if due diligence has uncovered something you were not aware of…
Where does that leave you? And, what can you do about it?
Not What You Expected?
When you discover that something is not as you expected, were promised, or as it was presented, it can be disheartening, frustrating and confusing. Especially so far down the line in the process.
It is quite common for legal, financial and commercial due diligence to uncover things you may not have been aware of. As mentioned in my previous blog about accounting due diligence, around 45% of mergers and acquisitions do not complete because of something that arises during these checks.
Some things you may discover include, but are not limited to…
- Lack of new clients and an ageing client list.
- Employment of the seller’s family members in key roles.
- No written contracts in place for employees, clients or suppliers.
- Actual stock is less than the stock recorded on the accounts, or what’s there is obsolete.
- Forecasted profitability is not as high as the seller made out.
If due diligence throws up something unexpected, it can change how the takeover progresses. That being said, these are usually minor issues which are easily fixed during this stage of the acquisition process.
What Happens Next?
Buying a business is a big decision, and one that can involve a lot of financial risk. If things are not as they seemed on the surface, you will need to have discussions with the people around you, such as partners, investors or representatives, about how the newly discovered facts affect the acquisition.
If the issues that have arisen are fairly minor, easy to resolve and pose minimum risk, you may wish to consider approaching the seller to renegotiate the sale terms, which may include the price and/or other matters contained within the heads of terms.
For example, if you discover that the stock is not as the seller stated, you should reduce the purchase price by the difference. Or, if the client list is ageing, you might introduce an earn-out stipulating that the seller must assist in attracting X amount of new business during the transitional period or beyond.
This means you will still get the business you wanted, but at a price that reflects its actual value and with terms in place that will be beneficial for its future success.
It may be the case that the due diligence brings to light issues that are just too big and make the acquisition no longer viable for whatever reason.
The seller may have failed to mention that the business is in the middle of a litigation case with a supplier, client or employee. The cost of which is impossible to pinpoint, leaving you at risk of ‘unlimited’ financial risk. Or you might even have discovered that the business has been involved in some kind of dubious activity or have licensing challenges!
Having identified problems, the seller does not have to agree to a renegotiation and may hold firm to the current terms of sale. Or you may decide that you don’t want to take on that level of risk anyway.
In such circumstances, it may be prudent to cut your losses and walk away.
It might not feel like an easy thing to do. After all, you have probably put in a lot of time, effort and investment to get to this point, and even though ‘it’s just business’ you may have become emotionally invested in your chosen acquisition as well.
There will always be other deals, and it is best to walk away from a bad one than risk ruin or a commercial nightmare.
Legalities & Funding
Once you have renegotiated, it is time to make sure you have all the correct legal contracts in place, ready to sign! This includes the Sales and Purchase Agreement plus Transitional Services Agreement.
The former is a document that sets out all the terms of the sale including the type of purchase (asset or share), the terms of the purchase and payment terms, among many other important things. The latter sets out the terms for the transitional period, a critical part of the sale process that ensures your acquisition is handed over appropriately.
Now, it is time for the last push. You are entering the last stage of your acquisition and are heading towards closing day. What happens next? Read my blog Closing Day – What To Expect to find out…
Unsure Or Reluctant To Walk Away?
With over 2 decades of first hand successful acquisition experience, I know exactly when a good deal becomes a terrible deal, and you should walk away. And a bad deal can cost you far more than you might imagine. I can also advise you on how to renegotiate new terms to achieve the best possible outcome.
To speak with me and discuss your acquisition, click here…