The smart way to get ac­qui­si­tions over the line

Belfast Telegraph - Business Telegraph - - News - By Rob­bie Mil­liken, Cor­po­rate­fi­nance Man­ager, Grant Thornton @grant­thorn­tonni For fur­ther in­for­ma­tion or ad­vice, Rob­bie Mil­liken can be con­tacted at Rob­­ Grant Thornton (NI) LLP spe­cialises in au­dit, tax and ad­vi­sory ser­vices.

Ac­qui­si­tions for many busi­nesses are key to de­liv­er­ing their growth plans. Hav­ing iden­ti­fied a tar­get and agreed a deal in prin­ci­ple, the Sale and Pur­chase Agree­ment (SPA) is of­ten the key doc­u­ment in most deals.

The SPA de­fines both the terms of the pro­posed deal and the ba­sis for cal­cu­lat­ing the fi­nal pur­chase price.

The fi­nal price paid for a busi­ness can of­ten dif­fer sig­nif­i­cantly from the ini­tial of­fer price agreed at the out­set of the ac­qui­si­tion process. The com­ple­tion mech­a­nism that de­rives the price ad­just­ments can re­quire care­ful ne­go­ti­a­tion.

While the com­ple­tion mech­a­nism will vary ac­cord­ing to the specifics of the deal, it is im­por­tant to con­sider how cer­tain value-ad­just­ing items are treated, what pric­ing mech­a­nism should be used and which ar­eas of the deal the com­pany and their ad­vis­ers should fo­cus on.

In the last num­ber of years, the ‘ locked box’ mech­a­nism has be­come pop­u­lar, pri­mar­ily due to there be­ing no need to ne­go­ti­ate and pre­pare com­ple­tion ac­counts.

Un­der a locked box mech­a­nism, the pur­chase price is fixed by ref­er­ence to a his­tor­i­cal bal­ance sheet prior to sign­ing the SPA. The buyer and the seller are of­ten at­tracted to this mech­a­nism be­cause of the po­ten­tial to save time and re­duce po­ten­tial dis­putes aris­ing dur­ing ne­go­ti­a­tions of the com­ple­tion ac­counts.

In most deals, a num­ber of items are dis­puted more of­ten than oth­ers.

For ex­am­ple, the treat­ment of de­ferred in­come as a debt-like item rather than a work­ing cap­i­tal item can fre­quently be a point of con­tention.

De­ferred in­come rep­re­sents a li­a­bil­ity on the bal­ance sheet for in­come in­voiced in ad­vance of the obli­ga­tion be­ing ful­filled. The ac­count­ing treat­ment of the de­ferred in­come may be a com­plex one and should be con­sid­ered and agreed early in the process to avoid the po­ten­tial stalling of a trans­ac­tion com­plet­ing.

Whilst de­ferred in­come is a com­mon con­tentious item, it is not the only item where the buyer’s and seller’s ac­count­ing treat­ment dif­fers.

It is there­fore im­por­tant, where pos­si­ble, that both sides and their ad­vis­ers are aware of the items where views dif­fer and the ra- tionale for these dif­fer­ences prior to the draft­ing of a de­tailed SPA.

An­other com­mon theme of late has been an in­crease in the use of earn-outs as part of the over­all con­sid­er­a­tion in a trans­ac­tion. The earn-out clauses within the SPA may also be­come an area of ne­go­ti­a­tion at com­ple­tion.

As a re­sult, it is worth con­sid­er­ing the im­pli­ca­tions of the earn-out at the out­set of the SPA draft­ing. A suit­able level of de­tail may avoid am­bi­gu­ity or con­fu­sion dur­ing the earn-out pe­riod.

It is worth re­mem­ber­ing that it is in the in­ter­est of both sides that the busi­ness meets its tar­get and that the earn-out gets paid.

Trans­ac­tions can be com­plex and time-con­sum­ing, with the com­ple­tion mech­a­nism and SPA key to the deal reach­ing a suc­cess­ful con­clu­sion.

Iden­ti­fy­ing and agree­ing on a com­ple­tion mech­a­nism and the treat­ment of con­tentious items early in the ne­go­ti­a­tions should lead to a smoother deal process.

Fewer dis­putes will al­low the busi­nesses and ad­vi­sors to fo­cus on the key com­mer­cial as­pects of the deal to com­plete the trans­ac­tion faster and more am­i­ca­bly.

Prepa­ra­tion and re­search is key to the suc­cess­ful com­ple­tion of a buy­out

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