Today’s guest article comes from Chris Bristow, a business debt expert at Real Business Rescue.
What to consider before making a business acquisition
The process of acquiring a business can be daunting as there are multiple elements to consider. Any mistakes could be costly, so it’s important to be as certain as possible that you’re making the right move.
Fortunately, the UK has a solid framework for business acquisitions and the robust regulatory and legal structure that’s in place can help you identify and assess your target company with relative confidence.
So what does it mean to acquire a business and what do you need to think about?
What is a business acquisition?
Company acquisition is a strategy commonly used by businesses looking to expand. It can help you explore new markets, for example, using a readymade infrastructure that blends with or complements your existing ‘brand.’
It means you acquire part of a company by purchasing some of its assets, but you can acquire all of it by also taking on its liabilities and obligations. The time you spend at this stage carefully considering this and other aspects of business acquisition reaps rewards further down the line, so here are some of the other key areas to think about.
Regulatory and compliance
Regulatory requirements vary according to the industry but failing to understand and act on the sector-specific obligations of your target company can result in hefty fines post-acquisition.
Additionally, compliance with employment laws is important to consider when company ownership is transferred. The stringent competition laws that protect consumers in the UK could also potentially negatively affect a transaction.
Due diligence
Due diligence offers a comprehensive understanding of the risks and potential rewards of acquiring a target business. Areas analysed generally include financial, legal, operational, and tax. You might include the following, for example:
· Financial: the target company’s assets and liabilities, balance sheet and profit and loss account, cash flow, debt and equity, and projections for future sales and profits
· Legal: supplier and employee contracts, history of regulatory compliance, licences that are needed to trade, previous claims against the company
· Operational: business systems and processes, such as manufacturing or distribution, IT equipment, products and services offered
· Tax: compliance, outstanding tax liabilities, tax returns, previous or ongoing tax enquiries
Cost and funding
Consideration should be given to how much due diligence and the legal aspects of the acquisition will be in addition to the purchase cost of the company. There are various ways to structure and fund a business acquisition, including equity financing, which involves selling shares in the business.
Other potential funding routes include asset finance, crowdfunding, and traditional bank loans. Seller financing may also be of value if you’re struggling to finance the whole deal and this involves paying the seller over a pre-determined period.
Management and staffing
Consider whether new management personnel will need to be assigned to the acquired company to fill knowledge gaps. It’s also important to establish the current management team’s experience and willingness to carry out your plans following the takeover.
You’ll need to think about efficiency in terms of staffing levels – whether all business areas are optimally staffed, for example, and if some employees may need to be moved to other departments to improve efficiency.
Business acquisition – a valuable opportunity for growth
Business acquisitions can provide valuable opportunities to increase market share or expand into new markets, but navigating sometimes complex legal and regulatory issues and conducting thorough due diligence is essential.
Giving careful consideration to the risks presented by a target business, as well as the rewards, means you can proceed to negotiate the deal appropriately and put your growth strategies confidently into action.
Chris Bristow is a business debt expert at Real Business Rescue – company rescue, restructuring and liquidation specialists with a wealth of experience in supporting company directors in financial difficulty.
