M&A Business Transfer – Business Acquisition
You have the idea to take over a company. But there are many questions that you are looking for an answer to. How to organise a business takeover? What is the right approach? Which experts to contact for assistance and advice? These and many other questions may concern many (future) entrepreneurs. Not illogical, after all, a company takeover is not an everyday occurrence. Clear explanations and practical support are therefore indispensable. And even if you have already had to deal with a company takeover, you can probably still use a helping hand. Because a business acquisition is a complicated process full of emotions and risks.
On this webpage, we published a business acquisition step plan, just a practical guide for a business acquisition. It not only gives clear insights into the transfer procedures, but it also provides you the support during the various stages. Which steps should you take? How do you handle this? What should you pay attention to? This takeover step plan answers some of your questions and contains clear tips.
This business acquisition step plan will not answer all your questions in detail. For this, you call us Asian Investment Services, at any time and without any obligation. We would be glad to provide you advice and support with a possible transfer of business.
• Stage 1 Preparation
– Step 1: Determine objectives and scope
– Step 2: Orienting conversations
– Step 3: Create acquisition search profile
– Step 4: Orientation on capital
• Stage 2: Approach
– Step 1: Select candidates
– Step 2: Approach candidates
– Step 3: First acquaintance
– Step 4: Explore tax aspects
– Step 5: Intention negotiations
• Stage 3: Negotiations
– Step 1: Value analysis
– Step 2: Assessing finance ability
• Stage 4: Completion
– Step 1: Letter of Intent
– Step 2: due diligence
– Step 3: deed of sale
– Step 4: Transfer
• Stage 5: Implementation
Stage 1 Preparation
A successful acquisition starts with proper preparations. In the first place, it is of great importance that you have clear for yourself what you want to achieve with the business acquisition. This will also define the kind of company you are looking for. A good insight into your financial possibilities is of course also crucial. Besides, it is important that you get acquainted with the various experts and advisors that you need during the acquisition process. In the preparation Stage, these steps come up one by one.
Step 1: Determine objectives and scope
Acquiring a company is a big step. Therefore it is wise to map the primary drivers.
Is a business takeover a long-cherished dream that you want to achieve?
Are you attracted to entrepreneurial freedom and financial independence?
Or are synergy benefits the main reason?
Put your objectives on paper and, even more important, consider whether a business takeover is the right way to realise those goals!
Support of us or any other counsellor could be precious in this first step. We point out the business options, consequences and the advantages and disadvantages. We also help to determine the strategy and to set out a timeline.
• Synergy advantages
Do you already own a company? Then synergy benefits are probably the main motivation for the acquisition of a company or its activities. Although the synergy benefits are often very promising, it is wise to first test and calculate them for yourself. Do not be too optimistic. Discuss your plans with a business mentor to discuss the emotional and cultural issues. The company culture is often also a factor for the perfect match/fit. A business mentor can provide essential support for entrepreneurs. You also should consult your accountant.
Synergy benefits can be divided into three categories:
Investing in a new company often generate better profits as investing in your existing company or interest from the bank.
Economies of scope
By horizontal or vertical integration in the supply chain, you can realise a higher profit. For example, you reduce the production costs by purchasing a raw material supplier (vertical integration). On the other hand, buying a business partner can lead to more revenue (horizontal integration).
• Economies of scale
A business takeover often results in faster growth of the company. This growth irrevocably leads to economies of scale, such as a lower purchase price per product or lower costs to produce.
Step 2: Orienting conversations
You now know for sure that you want to take over a company and you have put clear and convincing motives on paper. Then it is now time to get in touch with the parties that you need during the business transfer process. Make agreements with the various specialists and make sure that you are well informed during these orientation meetings. For example about how these experts can be of service to you and which method they will use.
Below you can see which experts you need during the acquisition process. Approach at least one organisation per specialisation. This way you get a good understanding of their services, and you can also compare these different professional service providers.
– M&A advisor
– tax advisor
Step 3: Create acquisition search profile
The next step is to create a precise profile of the company you want to purchase. Based on this profile you can efficiently search for candidate companies. A useful search profile describes numerous characteristics of the company. Some aspects you may not immediately think about, but which are of great importance. Making a correct search profile is far from easy. Moreover, the available financial resources play an essential role. For this reason, always use an M & A advisor for drafting a search profile. This way you ensure yourself a transparent and representative search profile that considerably facilitates the finding of prospective candidate companies.
A good search profile at least addresses the following characteristics of the potential buyer of the company;
– size of the business,
– customer base
– intended added value (assets, expertise, innovation, intellectual property etc.)
– company stage of life,
– organisation structure,
– corporate culture,
– financing structure,
– the position of director and shareholders,
– acquisition sum (range).
Make sure that the acquisition search profile contains as much information as possible about directives and conditions. Of course, this applies to criteria such as turnover and acquisition price, but also, for example, to customer numbers, margins and return on investments. An M&A advisor will for sure offer help with the preparation of the acquisition search profile.
Step 4: Orientation on capital
Before select candidate companies, it is advisable to know globally how much capital can be released to invest in an acquisition This first financial orientation usually takes place in conjunction with a financial expert of a bank and other financial institutions. A bank may offer insight into the possibilities and will assist in making a first consideration of the possible alternatives.
Stage 2: Approach
Stage 1 results in a clear overall vision and position of the business acquisition. Also, there are some insights into the different financing options. Next is to search for potential candidate companies. This may seem complicated, but with the right search channels and contacts, it can lead to fast and excellent pre-selection
Step 1: Select candidates
Of course, the previously established acquisition search profile the starting point for the search for candidate companies. For a moment, just focus on that search profile and reconsider the principles and check for example;
how attractive the selected industry and what is the reason for choosing this industry
what about determining factors, such as entry barriers, growth opportunities and (future) regulations?
are there renewed insights or new or changed criteria?
If necessary, update the plan and decide to continue or cancel the M & A process. With the continuation, a search for suitable takeover candidates can begin.
• Select search channels
Advert databases bring together supply and demand and are an excellent tool to start a search for candidate companies. This also applies to the advertising sections of financial journals and websites or industry associations and conference exhibitor lists. The most useful approach is to hire a M&A advisor like AIS as M & A advisors are aware of offers, can deploy their network and do have an understanding of the market and are therefore a very suitable partner in this Stage.
• Information Memorandum
Study all the data of the selected candidates, not only the given information but also collect yourself and restructure information as a SWOT or competitive analysis. Usually, after a non-disclosure agreement (signed a confidentiality statement) the seller will provide an information memorandum, which will contain the most relevant information about the company, such as:
– business activities
– legal structure and ownership of the company
– information about all fixed assets, such as company buildings and machines
– financial data; balance sheet and profit and loss account
– management and key personnel
– contractual agreements with third parties
– sales market, sales power, customer base/composition
– main suppliers
– notification of particularities
– information about the location and region
– reasons for selling the company
– an indication of the business acquisition price.
Of course, some parts will have more interests than others. For example, the product range, sales, customer database, profitability and reputation of the company can be decisive for the decision. Other primary concerns may include history, stakeholders, financial and fiscal situation, prospects, competitive position, production process etc.
Note: sometimes the information memorandum is only given after shown interest by the buyer and will initially suffice with only key data without further details
Step 2: Approach candidates
The result of the previous step is a list of interesting companies. Now select the candidates that do have preferences to approach. Let the M&A assist in the final selection and keep this number initially limited to 3 for to control the process and to keep the negotiations manageable.
Now it is time to approach the companies. Carefulness and confidentiality play a crucial role in this. Especially with the first contact, but also afterwards, and it is of great importance that the right information reaches the right person. This requires experience and expertise and with a hired M&A advisor, such as Asia Investment Services you will significantly increase the chances of success. Plan and practice (ask yourself; what if?) those meeting!
Step 3: First acquaintance
Visit together with M&A advisor the selected company. Get a company guided tour. To get the most out of a first meeting; prepare well a list of questions, issues and concerns in advance. Try to understand the company strategy, vision and especially their culture, so that you can get the most out of this first acquaintance. Some examples of those questions could be;
– are all contracts and permits still up-to-date?
– what are the existing lease and/or purchase contracts and their end dates?
– does the company comply with all laws, regulations and requirements and if not, what are the costs to comply?
– what characterises the staff in of age structure, education, experience, etc.?
– roles and attitude of key personnel and what are their thoughts on a possible takeover?
– are personnel changes necessary?
– do functions have to be cancelled or added? Or is a general review of (some) functions necessary?
– should particular business units or departments be optimised or divested?
– are administration and management information system still up-to-date?
– is there a present stocks surplus, and can those be eliminated in time?
– what determines the value of the company, what are the drivers?
Always make notes and make the reports available to the selling party with the request for corrections and supplements. Building files for references in later stages is vital.
Compassionate with the seller!
Whether or not a business takeover will take place usually depends on the takeover sum. After all, the buyer and seller have to come together at this point. But indeed price is not the only thing that counts. For the seller, the company often has high emotional value as he/she has probably worked hard for years to build the company to what it is now. Criticism will be harsh, and usually, they are concerned about the form of the continuation of their entrepreneurial life’s work.
So do not approach them as a salesman too business-like and distant, but show respect. A driven entrepreneur sells merely his life’s work more comfortable to someone who demonstrates commitment. Even if this financially offers (slightly) less. Let you be assisted by an M&A advisor for some guidance on this topic and discuss the role assignment as an advisor may behave more painful to the selling party.
Step 4: Explore tax aspects
Tax aspects play an important role in company acquisitions. Especially for the selling party, the tax settlement of profits is often of crucial importance.
The final design of a business acquisition is closely related to the relationship between seller and buyer. Do you inherit or buy a business from your family? The situation is very different compared to purchasing an enterprise from an unknown third party. In this takeover step plan we assume the seller is not a family member.
• Legal entity buyer
From a legal perspective, it is imperative whether the company acquisition is made by a private person or on behalf of a company. For example, it is often attractive to set up a legal entity as a limited liability company before you take over a company. In this way, the company and person are separated, and that would be practical as life usually develops differently from that of the company. BY this liability of the limited liability company cannot be directly recovered from the company shareholder(s). In addition to this legal aspect, it also makes a lot of difference in terms of tax which, a private person or a limited liability company, buys the business. A tax consultant or accountant will be willing to provide further information on these aspects.
• Legal entity seller
The same question; is the seller of the company a private person or a company? This too can have a significant impact on the tax consequences of the acquisition. If the seller is a company, the buyer can often choose whether he/she buys the shares of the company or buys the company. When the shares are acquired, nothing changes in the actual company, because at the moment of the acquisition, it does not matter for the company itself who the owner is.
If the company or some activities are sold and continued in another entity, the tax consequences could be completely different as there may be a tax claim on the goodwill and hidden reserves are transferred and will lead to a lower sales price.
The fiscal aspects of a business takeover need undoubtedly be discussed during the negotiations between the seller and buyer. If tax benefits are adequately assimilated into the transfer price, both may benefit from this.
But there are other important points for discussion at this stage. For example, deferred payment or an optional co-financing of the acquisition. Also, take in consideration other fairs and agreements which will increase the chances of a successful transfer and integration.
• Hire a tax specialist
Tax aspects do play a crucial role in every business acquisition, so hire a tax specialist. They will guide along the tax pitfalls and ensures that the deal will make optimum use of the fiscal savings options.
Step 5: Intention negotiations
The seller is interested in a deal. Then an exciting moment starts by entering the intention negotiations. The intention is to explore the contours of a possible deal and record these in the file. This will include the following topics:
– purchase price and payment method (cash, shares, earn-out, promissory notes)
– structure of the deal (assets, shares, lease)
– future involvement of the current owner and management
– follow-up procedure and timeline
– transfer and integration (post-merger plan)
– cancellation clauses, termination conditions of acquisition
– escrow service, indemnification obligations for deposit and complete payment
– prospective buyer exclusivity
– due diligence plan and execution
– information access to data, employees and stakeholders (could be part of due diligence)
– how to share information with employees, other stakeholders and the market
– financial options and other equity held by others and employees
– indemnification obligations of the business itself
– prohibited activities pending negotiation and closing
– non-compete/non-solicit agreements
– indemnification obligations by seller and buyer
– disputes (handled, jurisdiction)
• Letter of intent (see Stage 4 – step 1)
Gradually it will be necessary to appoint a lawyer as these negotiations are the basis for the so-called letter of intent (to be agreed in stage 3: Negotiations), in which all agreements between buyer and seller will be recorded.
• Other involved parties
Parallel with the negotiations with the selling party, at this stage also the starting discussions will take place with other involved parties, such as banks and management.
Negotiation is a profession, and in acquisitions a good negotiation strategy is crucial. Hire a M&A advisor for this as their specific knowledge and skills are very valuable in this vital stage.
Stage 3: Negotiations
You have come from a long list to a short list, and have met some possible acquirable companies. Based on these acquaintances and the information that is emerged, the choice must be made to get to the next stage and start negotiating. In this crucial third Stage of the acquisition process, there is the value analysis, assess the finance ability and conducting the intention negotiations.
Step 1: Value analysis
Determining the value of a company is not easy. There is no standard calculation. Of course, ‘hard’ data such as profit and loss figures do have an important role in the value analysis. But also perspective, the sector and number of offers and some emotional factors, in the form of goodwill, will have a significant influence on the ultimate value of a company.
• Valuation methods
An excellent value analysis is a method that precisely fit and represents the main factors that influence the company value the most. Some of these different valuation methods are:
– Discounted cash flow (DCF)
– The value of the company is based on the size of the expected (net) cash flows of the company.
– Economic value added (EVA)
In this valuation method, the creation of shareholder value is considered to be the most important financial objective. EVA is a measure of the results that the company derives from its normal business operations and is based on the performance in a particular period (based on current figures).
– Intrinsic value
The intrinsic value is the actual equity (value of all assets minus provisions and debts). The value of intangible assets is not taken into account in this valuation method. It is often not possible to take over the intrinsic value of the annual statements directly because the necessary corrections have to be made first.
– Capitalized value
This valuation method is based on the future profit capacities of the company. In doing so, an average and achievable profit figures are used.
Of course, a combination of the methods mentioned above is also possible. Which method is most suitable depends entirely on the situation. Therefore always hire a specialist for these value analysis. This can be an accountant, but also a M&A advisor. These professionals choose the right method and ensure a proper and representative valuation. This is not only about the outcome, but also about the calculation. The valuation should provide (convincing) arguments which may be used during the negotiations.
• Involve potential financiers in the acquisition process
Any financiers in mind? Then make sure that they are informed and let them participate in the process at an early stage. Avoid surprises. Moreover, in this stage, there must be an agreement on the payment method. If the future expectations are outstanding and decisive for a contract, suggest an ‘earn out’. So make a proper assessment of the possibilities and bring them into the negotiations.
Banks are often prepared to finance (a part of) the acquisition sum. A M&A advisor or company accountant will be able to assist in approaching the potential financiers and in choosing a suitable payment method for the acquisition.
Step 2: Assessing finance ability
The value analysis has given a specific range of the worth and therefore the price of the potential to the buyer. Based on this, now you may assess whether you can finance the takeover and which method is most suitable for this. In Stage 1 you have already determined globally how much capital can be released. In this Stage, it must be more specific and have to review the various financing options and see which option is most attractive.
Possible methods of financing are:
– own cash
– bank loans (take into account the borrowing capacity of the company)
– participation of venture capital companies or other risk-bearing participants (informal investors)
– payment in terms or a Staged acquisition
– subordinated loan by the seller
– a combination of above mentioned financing methods
The ability to finance a business acquisition depends partly on how the ownership of an enterprise is transferred. These days, besides former company owners keep their land and building (and become real estate investors), there are gradually more and more management buyouts and management buy-ins (compared to M&A strategic sales and family follow-up). Therefore let us briefly discuss these.
• Management buy-out (MBO)
In an MBO, one or more persons from the existing management team take over the company. MBOs have become increasingly common in recent years. Although it is often a well-considered decision, an MBO can also be a last resort if things go badly with a company Usually, the amount of MBO-ers own financial resources is not sufficient for the acquisition of the company. So they need to arrange other possibilities, for example through banks, venture capitalists or angel investors. Although there might also be external bidders with more capital, MBO-ers will usually have a significant advantage. It is a trusted relationship with the owner and other shareholders naturally work in their favour. Moreover, MBO-ers will have a lot of knowledge of the company so that the buying process can be handled quickly.
It is impossible to indicate the conditions for a successful MBO. But there are some critical success factors to be identified. In the first place, it is, of course, important that the company is commercially viable. This seems logical, but it often happens that a company does not generate enough cash flow after a takeover. Secondly, it is essential not pay too much for the company. Third, there is also a need for well-balanced and well-managed management team with sufficient individual qualities. But often changes the mutual relationships after an MBO, with all consequences. Last and most important; but be alert, scrutinise and examine the deal rationally. Avoid surprises and choose, among other things, for financial and legal audits. Also, a renewed business plan is indispensable, even though the company has been running for years and most likely is also needed for financing the acquisition.
An MBO process will undoubtedly need support. Therefore, engage one or more advisors, such as a bank and M&A advisor. These parties will help to take the right steps and to make correct decisions.
• Management buy-in (MBI)
Also, the number of MBIs has increased considerably in recent years. With an MBI, an unknown manager takes over the company. Especially managers who do not have confidence in further promotion opportunities and eventually want to become independent entrepreneurs are benevolent candidates. An MBI is financed with loan capital because the buyer’s financial resources are insufficient. A bank or M&A advisor will assist in these deals and will be able to offer different financing alternatives.
One of the most essential conditions for a successful MBI is that the buyer does have entrepreneurial skills. Good managers are not necessarily good entrepreneurs. Furthermore, proper preparation is crucial. Consider carefully whether an MBI fits into a career and whether the purchase is financially justified. Furthermore, it is essential to conduct a thorough analysis of the company and the market beforehand. And also a business plan may not be forgotten, it is not only a guideline, but is also an important means to support the financing application.
Stage 4: Completion
There is reached an acceptance of general guidelines terms of the transaction deal. Although the acquisition is already at an advanced stage, it is only at this stage that final and irrevocable decisions are made. The completion stage is, therefore, a fascinating stage. The letter of intent, the due diligence, the purchase deed and the transfer are the last official steps. Then the acquisition is a fact.
Step 1: Letter of Intent
All agreements you make during the intent negotiations with the seller are recorded in a so-called letter of intent. This statement ties the two parties together. However, good faith still holds a prominent place. Both seller and buyer can hardly withdraw after signing the letter of intent. Unless there are unpleasant surprises, real deal breakers, during the coming due diligence. If this investigation does not show any details and one of the parties still wants to withdraw, the other party can charge the costs incurred and even the lost profits.
Although the Letter of Intent is not tied to a specific form, the points mentioned in Stage 2 Step 5: Intention negotiations in addition to the period in which the statement is valid, almost always be included in the Letter of Intent.
We have already given this list as these topics should be used in the negotiations as they could also be deal breakers in an early stage.
It is also wise to include agreements in the letter of intent on the due diligence process, that will carry out in the next step. For example, access to all the necessary information and the opportunity to thoroughly check all data is an important point to include in detail.
As the letter of intent forms the basis for the final purchase contract, it is recommended to use a lawyer to draw up this statement.
Step 2: due diligence
During the due diligence (financial and legal audit) the goal is to check the accuracy of the received information about the company. During this assessment, the entire company can be examined. From financial statements and other financial data up to and including tax and legal aspects. This prevents you from buying a pig in a poke or encountering significant drawbacks or hidden defects after the acquisition.
• Usefulness of a due diligence
In addition to the fact that a book search reveals any hidden defects, it is also an extremely suitable accounting document for financiers. They ask for complete and well-founded information about their investment. But in the future, the due diligence can even come in handy. If you want to file a claim for damages against the seller at a later stage, you must be able to demonstrate that you have commissioned such an investigation. It is therefore crucial that you have a report drawn up by the due diligence. Moreover, in disputes the court can also more easily test the information provided by the seller if a report is available.
Carrying out the due diligence is a time-consuming task that requires specific expertise. You have to leave this research to specialists. In any case, please hire an accountant, lawyer, valuator and tax specialist. Together they can screen all dimensions of the company so that you get correct and complete insights on your possible purchase.
The due diligence can result in unpleasant findings. There are numerous claims against the company, the profit figures are not correct, or the production does not meet the requirements. If so, there are two options: to abandon the takeover or return to the negotiation stage. With this last option, negotiate will restart on the purchase price and the other transaction conditions. Of course, new agreements have to be recorded by a lawyer in an updated letter of intent.
Step 3: deed of sale
The buying party is responsible for drawing up the deed of purchase. The signed Letter of Intent is the starting point for this. In the deed of sale is set the purchase price, as well as a specification of the movable and immovable assets involved in the acquisition and the mutual guarantees of both parties. For the drafting of the purchase deed, it is best to hire a lawyer.
Step 4: Transfer
The final step of Stage 4 is the actual transfer of the company. This includes the signing of the deed of sale, the passing of the deed of purchase and the (partial) payment of the purchase price. Depending on the manner of transfer of the company, you determine whether the ratification of the transfer takes place at the notary or a lawyer. There are two options: a share transaction and an asset-liability transaction. Both options are briefly discussed below.
• Share transaction
If it is a private or public limited company, then the acquisition is about shares. As the new shareholder, you will be the owner of the entire company, which includes all assets and liabilities, as well as all rights and obligations associated with them. The transfer of ownership of shares, as well as that of real estate, can only be recorded at the notary. The buying party determine which notary should be used for this.
• Assets/liabilities transaction
In an asset-liability transaction, there is not an acquisition of the entire company, but only certain parts. By buying the assets only, the seller retains the shares of the company. This also means that the debts of the company stay with owner/seller of assets. An asset transaction does not necessarily have to be ratified by a civil-law notary, as a lawyer can be used for this acquisition.
• Approach the bank
Depending on the situation and the buyer determine the involved civil-law notary or lawyer for the ratification of the transfer. In addition, most likely, these documents are needed to approach your bank for complete the financing.
• Discussions on transfer
The large number of parties present at the completion of the transfer sometimes leads to lengthy and often unnecessary discussions. Stay alert, bright and stop those useless discussions early. After all, it is not the intention to start the negotiations start again. The focus now is to complete the acquisition deal.
Stage 5: Implementation
The time has come: there is a new owner of the company or activities/assets. The goal is now to make it a success, and this only the full responsibility of the new owner! Be realistic. Make a clear plan for the future to work along in a structured way to achieve the goals.
• Post-merger plan
Do fully realise that now the most crucial period begins. An excellent post-merger plan for the first 100 days and after that is therefore indispensable. Hopefully, the start drafting this plan has been started at an early stage while the negotiations were still ongoing. Present the complete post-merger plan after the actual transfer to, but it is even better if you start earlier. For some suggestions about the procedures and content read our article here. In our view the most important topics are;
– focus on the strategic goals that should lead to added value
– specify the scope of integration, such as; fully integrated, only shared service staff, separated businesses etc.,
– define the urgency and time-schedule, is it a turnaround under time pressure or a gradually change management to optimise,
– communication; internal and to the market,
– unify cultures,
– retention and motivation of personnel and especially key persons,
– maintaining and expanding customer base,
– trust and understanding of key suppliers,
– tuning mutual processes or uniform processes.
– how or who should implement changes
– is external expertise and assistance needed for the transfer and implementation (Asia Investment Services or fellow companies can provide these service)
• Financial plan
Apparently, in the plan will also be included the financial forecasts and objectives. For financial modelling and set critical success factors, use your accountant for this. Besides, after a while, you and your accountant will assess whether the objectives have been achieved and how you will continue in the future.
• Transfer induction period
A transfer may benefit if the seller will assist with knowledge and experience for a specified period of time. But make sure it is done, and this kind of collaboration works well as no ambiguities or frictions may arise.