February 2008

GETTING TO GRIPS WITH FINANCE IS KEY TO M&A SUCCESS

With changes to capital gains tax looming there has been a dramatic increase in merger and acquisition activity throughout the north east in recent months. The new laws, which are due to come in to force on 6 April 2008 will effect anyone who’s looking to sell their business for over the £1 million mark. Steve Mitchell, of Acumen Accountants and Advisors, says it’s vital to do your homework before launching into any merger and acquisition activity.

The prospect of buying the company you’ve always wanted is enough to get anyone dreaming of hitting the big time but many a deal has turned sour long before the Champagne corks are popped. All too often people are too eager to get a deal completed as quickly as possible and rush headlong into negotiations and costly legal activity before knowing that the deal is truly within their sights. The real key to a successful merger or acquisition is to lay the groundwork and make sure all your ducks are in a row before taking the killer shot.

While it’s great to be ambitious, it vital that anyone involved in merger and acquisition activity takes regular reality checks.

There are five key steps to a successful mergers and acquisitions deal. The first is to get an accurate evaluation of how much the target company is really worth to you - the seller may of course have a different perspective on value. It will also give you an idea of whether the target is interested in being bought at all. Seeking expert, independent financial advice at the start of any deal can save not only a lot of heartache but can help avoid major financial headaches too..

The second question to ask is "Can we really afford this?" Taking into account available funds in excess of that required to runyour own business will give the buyer their first insight into what additional funding they may require if they wish to proceed. In many cases additional finance is needed. Determining the most appropriate form of finance will depend on the deal. As with everything else in business their is a direct relationship between risk and reward and the more speculative the deal the more expensive it will be to secure finance. The first port of call will be discussing with the bank what funding may be available. Bank debt is the cheapest form of raising finance, but if the deal is not within the bank’s risk profile there are other options such as joining forces with a venture capitalist or business angel. Generally, venture capital firms look to retain their investment for between three and seven years and during that time they will expect to generate at least a 20% return per annum and they may retain an active involvement in the business strategy. A company is suitable for venture capital investment if it exhibits high growth prospects, has a product or service with a competitive edge or unique selling point and has a strong management team.

The third step, once the basic details have been gathered, is to prepare more in-depth projections and analysis to ensure the correct type and level of financial support will be in place. At this stage, when the company knows that it is in a strong position to make an offer, it’s crucial to have a good legal team in place. However, seeking legal advice before the shape of the deal is defined can be an unnecessary waste of effort on the part of your legal team and a drain on budgets.

The fourth step will be entering into negotiations with the target company and this requires nerve. Often it can be a case of brinkmanship waiting to see who can last the course. But even when a deal is struck, there is much work to do before that can be legally binding. The solicitor will draw up the Heads of Agreement, which will make it clear that the deal could still fail if funding is not found.

The final step will involve more in-depth talks with the lender/investors to secure the finance for the deal. If the lender/investor feels happy with the initial prospect, they’ll expect to have the finer details confirmed through the due diligence process.

While last month’s (January) announcement by Alistair Darling amending the Capital Gains Tax legislation has reduced some of the uncertainty that has been seen in recent months, there’s no doubt that 2008 is shaping up to be a very busy year in the north east for mergers and acquisitions activity and knowing that you have solid financial advice can ease the strain during that process.

Steve Mitchell is an Associate at Acumen Accountants and Advisors and is an expert in Mergers and Acquisitions. He can be contacted at steve.mitchell@acumen.info or on 01224 573904