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Expanding your business with a take-over or buyout

Once your business has been trading for a few years you may be in the fortunate position that you can grow by taking over or merging with another business. This is often covered by the term "Mergers and Acquisitions" (M&A) and it's this term that your accountant or solicitor would understand.

Although many people will consider this the same thing, legally they are two different processes - a merger is where two businesses become a single business - Joe Blogs Enterprises merges with Fred Smith and Co and the combined business acts as a single one. An acquisition is bascially a take-over where one business takes over the other completely and is the new owner of the other (although the 2nd might continue to trade as a seperate trading entity).

Of course, if you are considering taking over another business then you need to have the money available, this would either come out of the businesses capital (money that's in the bank), or you may be able to find business finance that will "loan" you the money. A third alternative is that sometimes you can stage payments so that for example you have to find 50% of the money up front, then another 25% of the money either when a target (such as turnover) reaches a particular level or after a certain amount of time, and the final 25% when another target is reached. If you are looking at staged payments it is essential that you get very good advice or you could end up paying when you were not expecting to.

Often the M&A process consists of :-

  • A letter of intent is drawn up that says that the two businesses will keep the possible merger/acquisition confidential until due diligence has been completed.

Due diligence is then undertaken by trained professionals. The specialised financial training needed to carry out due diligence is something that many accountants may have been through as will some solicitors and tax advisers. Your advisers will be looking at several things including :-

  • The turnover and profits of the business
  • Any liabilities of the business
  • The value of the assets
  • How much the business is worth
  • How the business is run including the processes and policies used
  • How the purchase or merger can be structured

Once the due diligence is completed, assuming that both parties involved still agree on valuations etc a contract is drawn up by solicitors detailing the conditions, any warranties given by the seller, any restrictions on the seller and even termination rights (covering what may trigger the cancellation of the contract).

If you are planning to grow your business this way then it's essential that you talk to someone with the right level of training and experience. Your first port of call would probably be your accountant, but don't be surprised if they tell you that they can't deal with it themselves and refer you to a specialist - in fact you should be grateful if this happens as it's a big move in any businesses life and you need to know that you are getting the right advice.


 
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