In my last posting I gave the first 5 tips, which covered the stage before an offer for a business had been made. My next tips pick up after the offer is accepted.

During Due Diligence :

This is the stage where you test the assumptions you made when you put together your offer.

6. Appoint a good accountant and lawyer. The potential long term costs of not taking appropriate advice should be considered very carefully!

7. Go back to your offer and the assumptions you made. Ensure the information provided by the vendor can be verified and corroborated by other data.

8. Consider the earnings figure you were presented with when you made your offer. Is it really sustainable? Will it be affected by exchange rate movements? Are contract terms due to change, will cost rises be matched by increases in revenue?

9. If you are acquiring shares, consider the potential for hidden liabilities. The most common are taxes – including corporation tax, VAT, PAYE, National Insurance etc. Also look at ongoing litigation, bonus arrangements, customer overpayments and any other matters appropriate to the business.

10. Spend a lot of time on your financial projections. Assess the impact of potential problems (reduced sales, lower margins etc) in a sensitivity analysis, paying particular attention to cashflow. Consider whether the budget complies with covenants set by the bank, and the amount of head room you have.

As I said in the last post, the priorities in an acquisition differ, dependent upon its nature – there are many other risks which should be considered in making an acquisition decision.

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The credit crunch is having an affect on all asset prices, and this is bringing some first time buyers/investors into the private SME market. With this in mind, I thought I would ‘blog’ some tips for SME acquisitions.

Prior to an offer being made :

1. Buy the trade / assets, and not the shares. With a company you inherit its problems and therefore potential liabilities. There are also tax advantages to buying the trade and assets. This is particularly important for ‘distressed’ acquisitions.
2. When reviewing profits for valuation purposes watch out for shareholders / directors remuneration. If the costs of their input to the business are not in the P&L, the valuation will be inflated.
3. Consider other missing costs. This is particularly relevant where a seller has more than one business - is rent correctly allocated? Which company does the accountant charge? etc
4. Customers. Reliance on a smaller number of large customers is a risk. The health of the customer base in the current economic climate is crucial. Ask the seller for outline details of clients – their size, sector etc and review the level of their own personal contact with customers. Consider what protection should be added into the offer – such as an ‘earn out’ for the seller.
5. In your offer be careful to clarify the assumptions you have made, and the conditions attached. This will make it easier to renegotiate the price should issues be identified during Due Diligence.

I will cover the 2^nd set of five tips in my next post.

Please note that the tips differ, dependent on the nature of the acquisition. I have been very general here and there are many other risks which should be considered in making an acquisition decision.

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This scheme will support bank lending, of 3 months to 10 year maturity, to UK businesses with a turnover of up to £25 million who are not able to access the finance they need. It will provide loans of between £1,000 and £1 million and is currently available until March 2010.

The guarantee can support new loans, refinance existing debt, or conversions of existing overdrafts into loans to release capacity to meet working capital requirements.

It is a very flexible tool in comparison to the previous scheme – the parameters in size have been widened significantly, and an interesting new feature is the flexibility to use the EFG in 'share' transactions.

Only time will tell whether the EFG will be a success. The decisions to lend are delegated to the banks, who will apply their own criteria. However it appears to be a step in the right direction, and I for one hope that the EFG scheme will provide a lifeline for the many viable, but cashflow pressurised, SME’s in the UK.

See guidance from Business Link by clicking here.

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