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Mergers Acquisitions & Takeovers in Northern Ireland

Common ways to expand your business include making (a) a strategic acquisition and (b) merging with another business.

An acquisition is when you buy another business and end up controlling it.

A merger is when you integrate your business with another and share control of the combined businesses with the other owner(s).

This guide provides guidance on the reasons for using these methods to expand a business and the advantages and pitfalls.

It explains what you should know and understand about your own business, how to evaluate the business you hope to buy and staffing matters to consider. It also goes into the legalities involved in mergers and acquisitions.

Although the guide does not cover situations where your business is the subject of a takeover bid or when you are selling your business, some aspects of this guide may be relevant if you are dealing with an unwanted takeover bid.

How your business could benefit

There are many good reasons for growing your business through an acquisition or a merger. These include:

  • obtaining quality staff or additional skills, knowledge of your industry or sector and other business intelligence
  • accessing funds or valuable assets for new development
  • your business underperforming
  • accessing a wider customer base and increasing your market share
  • diversification of the products, services and long term prospects of your business
  • reducing your costs and overheads
  • reducing competition
  • organic growth ie the existing business plan for growth is progressing too slowly

However, a merger or acquisition can also create its own problems.

Deciding if your business is ready

If you are thinking of growing your business through a merger or an acquisition you must consider if your business is ready for expansion. Take steps to make sure that you:

  • understand and know your business
  • carry out a SWOT analysis
  • assess external factors, especially the impact of the economic climate on the price of a deal
  • are clear on what you expect to achieve in your business plan with the deal
  • have or have access to the necessary finances

SWOT analysis

This is a review of your business' strengths and weaknesses and the opportunities and threats your business faces.

  • Consider your business strengths such as your strong financial position.
  • Consider your business weaknesses such as low stock levels.
  • List your business opportunities (related to strengths) such as new markets.
  • List your business threats (related to weaknesses) such as competitors who may poach customers with their ability to provide product on demand.

Analysing your results carefully will show you how to build on strengths, resolve weaknesses, exploit opportunities and avoid threats.

Another strategy technique is a gap analysis. This involves detailed analysis of where your business is now and where you want it to be in the future. By analysing the gap between the two, you can find ways to bridge it.

Remember that apart from paying for the business you acquire, you may have extra expenses to take into account.

Making the right choice

Opportunities to grow by merger or acquisition may exist where the target business:

  • is undervalued
  • does not use its assets to maximum effect
  • would benefit from relocation
  • has poor management

By contrast a merger or acquisition may not generate the benefits you hoped for if the other business is already performing well.

Approaching a target business

When you have identified a suitable target business to acquire or merge with, you will need to register your interest in doing so with the owners or management of that business.

You may find it useful to make an appointment with the target or its advisers. Make sure the target understands why you are interested in a deal and how you intend to finance it. Prepare the questions you would like answered. This is also your opportunity to explain your business and your future plans.

Find out what the owners' plans are for selling their business and whether they intend to remain involved in it. Consider their motives for selling.

Many businesses get professional advice from solicitors or accountants to help them decide.

Assess the target business

If you have identified a target business to buy or merge with, you will need to use due diligence to find out all you can about the business and its prospects. For more information on due diligence.

You can do a lot of this yourself but you will find it invaluable to get some advice from an industry expert.

What you can do

Talk to those who may have an interest in the target business: the customers and suppliers.

Consider asking about:

  • the business' products or services
  • the customer base
  • how the business compares with competitors in terms of payments
  • who the main contacts are in the business
  • the extent of involvement of the owner

It is important to get hold of financial information about the target business. This information should be audited - if not, consider requesting an audit to be carried out.

You will be interested in historical information and trends in sales and profit margins as well as in forecasts for the future. You should consider whether forecasts are realistic and tally with your knowledge of the market and its prospects. Look at stock levels and debt collection trends, at investments and the business' debts. 

What the industry expert can do

Industry experts could include market researchers, accountants, lawyers, bankers or tax advisers.

Ask for their views on:

  • market conditions and changes
  • factors affecting market prices and margins
  • the outlook for the business' products or services
  • the health of the business
  • other players in the market

Assessing business value

The results of your due diligence on a target business will help you to assess its monetary value. Professional valuation advice will play an equally important role. You will need a professional valuations expert for advice on the numbers you use in any valuation technique.

Most valuation techniques concentrate on financial ratios or financial indicators of performance such as:

  • Assets - using the business' net book value (NBV) ie what it owns (its assets) less what it owes (its liabilities). The NBV will usually be refined to reflect current circumstance and future prospects.
  • Price/earnings ratio - using the price/value of the business divided by its profits after tax. Care is needed to calculate a reasonable profit figure and price/value.
  • Entry costs - using the cost for starting up a similar business, which might include the assets, product development costs, employment costs and marketing costs, and including any savings you can foresee.
  • Cashflow - using cash generated over a number of years in the future.

A valuation expert will also help you value things about the business that cannot easily be measured, such as brand strength, quality of the management team and relationships with key customers and suppliers. They will help you assess the risks involved in the target business and the deal itself.

Accountants, lawyers and tax advisers often have extensive experience in valuations - it is worth paying for their experience as it will largely reduce the danger of you paying too much or owning unforeseen debts. 

What can go wrong?

The extent and quality of the planning and research you do before a merger or acquisition deal will largely determine the outcome. Sometimes situations will arise outside your control and you may find it useful to consider and prepare for the following situations.

A deal could become expensive if:

  • you cannot agree terms such as who will run the combined business - in a merger - or how long the other owner will remain involved in the business
  • regulatory authorities object to the deal eg on the grounds that it reduces healthy competition
  • your own business' performance suffers because of time spent on the deal and a mood of uncertainty

You may also face pitfalls following a deal such as:

  • the target business does not do as well as expected
  • the costs you expected to save do not materialise
  • key people leave
  • the business cultures are not compatible
  • diverted resources from your business' main aims

Get expert advice from professionals with experience in similar deals to help forecast potential pitfalls and to address any that arise. 

Legal aspects to consider

There are legal aspects involved in the due diligence and the deal stage of a merger or acquisition. These are separate from the legalities in agreements, terms or contracts for the deal.

Due diligence stage

For legal purposes, make sure you:

  • Get proof that the target business owns key assets such as property, equipment, intellectual property, copyright and patents.
  • Obtain details of past, current or pending legal cases.
  • Look at the detail in the business' contractual obligations with its employees (including pension obligations), customers and suppliers - think about any likely or future obligations.
  • Consider the impact on existing contracts of a change in the business' ownership.

Always seek expert advice to assess the implications of legal due diligence.

Deal stage

When you are considering general terms of a potential deal you will probably seek certain confirmations and commitments from the vendor of the target business. These will provide a level of insurance and comfort about the deal and are indications of the vendor's own confidence in their business.

A written statement from the vendor that confirms a key fact about the business is known as a warranty. You may require warranties on the business' assets, the order book, debtors and creditors, employees, legal claims and the business' audited accounts.

A commitment from the vendor to reimburse you in full in certain situations is known as an indemnity. You might seek indemnities for unreported tax liabilities.

Your professional adviser can assist in reviewing the content and adequacy of warranties and indemnities.

The deal itself

After you have registered interest in doing a deal with the other business you will probably follow a process including these steps:

  • appoint professional advisers
  • carry out due diligence
  • value the business
  • negotiate finances
  • make an initial offer subject to contract
  • agree the main terms of the deal including a payment schedule, warranties and indemnities from the other business
  • update due diligence based on access to the target business
  • finalise the terms of the deal
  • announce the deal and communicate it to staff

In the case of a merger, you will need to integrate aspects of the two businesses including:

  • management 
  • staff
  • technology
  • communications
  • processes, policies and procedures
  • payroll
  • training
  • personnel policies
  • invoicing and purchasing systems

The role of professionals

It is important for you to seek professional advice when considering a deal. You may use bankers, accountants, lawyers, surveyors and valuers for different matters. Advisers with experience in deals will help you make the right choice, pay a reasonable price and avoid pitfalls during and after a deal. 

Advisers can provide valuable guidance in areas such as valuing the business, financing the deal, reviewing legal aspects, terms and contracts and specialist valuation of specific areas of the business.

Make sure you agree clear terms of reference and how the work of different advisers will be coordinated. Advisers may charge fees on an hourly, fixed or contingent basis.

Staffing issues - before and after

One of the main attractions for a merger is that of increased efficiency, which means you will probably need to make some staff cuts or changes.

A merger or acquisition will often go more smoothly if the staff in your business and the target business are protected from uncertainty.

Before the deal gets under way you may need to consider keeping key staff informed. You may also consider ways to retain key staff (eg through payment of bonuses or other incentives) until the merger is complete. You may want to ask some key staff to help with the due diligence or to take on more responsibilities while you are tied up negotiating the deal.

You may also want to get to know key staff in the target business to help you assess abilities and ambitions and how good a match the deal will be.

After the deal you may find it useful to see staff individually or in small groups to explain future plans, what it means for them and to answer questions.

Staff issues

You will need to think about staff matters while you are considering a merger or acquisition.

These may include:

  • skills gaps in your business and how to fill them with staff in the target business or new staff
  • which staff from your business and the target business you plan for which posts
  • pay differentials and how you will address them
  • how to get staff from both businesses to build working relationships and work towards common goals
  • how to share knowledge between staff
  • appropriate policies and procedures for the combined business
  • relocation issues
  • trade union matters

It is important to get expert advice to help with staff issues such as new employee terms (including pension provision), changes in employment contracts and your responsibilities to employee rights after a merger or acquisition. For more on employment issues click here.

Here's how I made an acquisition

When Penny Harper set up her recruitment consultancy, The Recruitment Link in Newcastle under Lyme, expansion through acquisition came sooner than expected. In her first year of trading Penny was approached to buy another business in the area.

What I did

Know the market

Although I wasn't spending a lot of time seeking an acquisition to accelerate our growth the opportunity was interesting. I knew the national and local recruitment market well and believed that we could establish a stronger base if we could buy the business at the right price. However, the recruitment business I was offered was struggling and, considering I wasn't interested in some parts of it, the initial asking price was too high. So, after a few conversations and a review of their financial results and prospects, I politely declined the opportunity.

I used my accountants to help with the financial evaluation, but my decision wasn't based solely on their advice. I talked to the owners and staff, looked at the client list, assessed regulatory compliance and went through operational systems in detail. It was the only way to find out what was really going on under the surface. I concluded that with different management it would fit and had profit potential, but the deal had to be right.

Negotiate the right deal

Following the breakdown of initial discussions, negotiations started again after a short period. Having done my original research I was very clear about what I wanted and, given that nothing had changed, was prepared to stick to my valuation of the business. Persistence pays and we finally agreed a deal.

Getting the contract right was a key part of making the deal successful. I took advice from my lawyers and before signing reviewed all aspects of the contract carefully. I was keen to make sure that I didn't pick up any costs I shouldn't, such as unrelated creditors, vacant property charges, and equipment or vehicle rentals. I was also keen to make sure that existing arrangements with clients and temporary staff were transferred to me.

Manage the transition

Whatever the route to buying a business, there's a lot of hard work in managing the change to new ownership. Part of my pre-acquisition review focused on how I'd handle the first three months after I owned the business. 

After I'd completed the deal the first thing I did was talk frankly to all the temporary staff on the company's books and to all the active clients. Not all the clients were profitable accounts so there were operational and pricing changes that needed to be made immediately. I explained the changes to everyone concerned and the majority of clients stayed with us. They could see that the way I intended to run the business would cost them more, but would lead to a better and more reliable service. I also replaced the financial controls in the acquired business with my existing systems and processes. 

What I'd do differently

Think about the work involved

I probably underestimated the extra effort needed to buy a business and make it work how I wanted it to. Buying a company can be very distracting and time consuming, so make sure that focus remains on the existing business as well.

Top tips:

  • Have clear, realistic objectives about what you want to achieve
  • Remember that accountants primarily look at the numbers - it's up to you to look at the whole operation
  • If you've got doubts, don't ignore them, review them and don't be afraid to walk away if the concerns are serious

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