The pitfalls to purchasing a business

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By Ami Bhatt

Taking your business to the next level can be challenging especially when it involves an acquisition. But identifying a business that you want to buy is only the first step to success and whether you’re seasoned in the art of acquisitions or it’s your first foray into the world of acquisitions, there are ways you can reduce risk and avoid potential pitfalls:-

  1. Advisers

Once you’ve identified the target business, form a team of experts that you trust from accountants, business advisers and solicitors. Brief them as early as possible because having a clear understanding of how your proposed acquisition will be structured from a business, tax and legal perspective, sets a solid foundation from which to progress.

  1. Heads of terms – confidentiality and exclusivity

It’s important to then take a step back and consider having a written head of terms which clearly sets out a commercial agreement to form the basis of legal documentation. The heads can also include some protections for both parties such as confidentiality for the seller, ensuring confidential business information is used only for the purposes of acquisition, and an exclusivity period for the buyer to give adequate time to conclude the acquisition without the fear of being beaten over the line by a competing bidder.

  1. Due Diligence

Carry out commercial, financial, and legal due diligence on the target. This will give you a good understanding of what you’re acquiring and the areas you need to focus on to obtain protection from the seller in the form of indemnities and warranties, and whether to improvise things like processes following the acquisition. The key legal areas to consider are property, employees, banking and related security arrangement and contractual relationships. Financial due diligence is equally important to ensure that the business you’re buying is worth what you’re paying. Operational/commercial due diligence will help you understand the customer and supplier profile and future sales pipeline.

  1. Price

Your purchase price and how you’ll pay is a fundamental part of any transaction. Your purchase price payment strategy will largely depend on your financial means, bargaining position of all parties and the risk of the target business continuing to perform as expected. Sellers usually prefer payment in cash on completion but it’s becoming more common for buyers to make purchase price adjustments based on performance or some element of deferred consideration.

  1. Post Completion Continuity

It’s easy to switch off after a transaction is complete but it’s important to consider – both before and after the sale – how the business you’ve purchased will function? What elements of the new business will you keep, integrate or change? Spend time strategizing about how the target will integrate with your existing business – looking at areas such as staff, customers, suppliers and operations – so you can flush out potential future problems before they occur.

And finally, consider using a business broker or transfer agent. They can help you to not just find a business, but the right business to suit the future growth strategy of your company.

Ami Bhatt is an Associate in the Commercial Team at Gardner Leader solicitors