Most of the protection in a deal is negotiated before the money moves, not recovered afterwards.
Price is only part of it. Warranties, indemnities, what is held back and for how long, and where the risk sits if something surfaces later all decide how exposed you are once you own the business.
Here is how buyers protect themselves.
Overpaying
Did you know that the vast majority of acquisitions result in a loss of value for the buyer, and this is often because they paid too much in the first place?
To avoid finding yourself in the same position and failing to recoup your investment, there are some simple but essential steps that you should take.
- Prioritising synergies
Synergies are, of course, vitally important for both sellers and acquirers. It’s crucial to focus on the various benefits that you will gain from acquiring a particular business. However, prioritising synergies to the point where you fail to take into account any potentially serious issues that could occur from an acquisition can have severe consequences.
In short, it could result in your business overpaying for a company that isn’t as suitable as you may have hoped – and then having to deal with the consequences post-purchase.
As a result, when you are considering possible acquisition targets, it’s a good idea to weigh up both the synergies themselves and the suitability of the proposed price.
- Entering a bidding war with other acquirers
If a business that’s up for sale has attracted several eager would-be investors, then you may find yourself having to pay more than the company’s true market value to see off your competition.
- Neglecting due diligence
While it may be tempting to rush through the due diligence part of the M&A process to secure a deal, you do so at your peril.
Speeding through due diligence could result in a range of substantial problems both pre- and post-sale.
For example, if you rush through records of your target’s finances, liabilities, and the details of their operations, you could come away with an artificially inflated valuation that doesn’t reflect the genuine value of the business. Consequently, you will overpay.
Similarly, rushing due diligence could mean you fail to spot other areas of concern, such as financial errors, evidence of compliance issues, or possibly even pending legal cases. Any one of these problems could see you failing to recoup your investment and possibly suffering other damages too, such as a loss of your new business’s reputation.
The takeaway? To avoid paying for a business, you need to take some precautions. These range from having a thorough valuation carried out before agreeing on a price through to setting a ‘bidding budget’ and making sure you dedicate enough time to due diligence.
The importance of analysing areas of high risk
Speaking of due diligence, during this phase of the M&A process, you should be sure to focus on the highest-risk areas if you want to protect your investment.
These high-risk areas include:
- Any pending litigation, as mentioned above. A lawsuit could be seriously problematic for your acquisition to say the least, especially if there is a strong case against your target.
- Bad debts. It goes without saying that you don’t want to inherit these – which is why it’s so important to go through the company’s accounts with a fine-tooth comb during due diligence.
- Problematic contracts. These can include employment contracts, supplier contracts, customer contracts, and any relevant licensing and agreements. You need to be aware of any potential problems with these contracts and you should also verify if any of those contracts will be ending as a result of the sale. After all, you don’t want to suddenly find yourself sans some crucial suppliers or clients once the former owner has departed as this could make a serious dent in your investment.
Negotiating warranties and indemnities
As with due diligence, the importance of warranties and indemnities can’t be overstated when it comes to acquiring. It’s crucial to negotiate warranties and indemnities in detail with the seller to ensure the protection of your investment.
Doing so will give you peace of mind, and it will also give you a firm legal foothold should the seller fail to honour them, as you can claim for breach of warranty and seek appropriate recompense.
There are several different types of warranty for you to negotiate, depending on the unique circumstances of the acquisition. These include:
- Tax warranties
- Financial warranties
- Legal warranties
- Operations warranties
- Environmental warranties
As for indemnities, these are contractual clauses that offer additional protections for the buyer, providing a route for the acquirer to make a claim for losses that occur following the purchase of the business. Indemnities are typically drawn up to cover any areas of notable risk that were discovered during the due diligence process. Unlike warranties, they do not require the buyer to demonstrate a breach of contract, providing a more straightforward route to financial recompense should a loss occur.
However – and this is sure to come as no surprise – sellers are likely to embark on rigorous negotiations when it comes to indemnities, to reduce their own exposure to a significant financial blow. For instance, they could seek to implement a time limit on these clauses or set a financial cap that prevents claims from passing a set threshold. These kinds of restrictions can also be applied to warranties.
Tactful but stringent negotiation is required when it comes to crafting effective warranties and indemnity clauses to ensure the protection of your investment should the business suffer any significant losses post-sale.
Why use a business broker to help protect your investment?
Acquiring a business is a weighty financial decision that leaves you open to potential losses should anything go wrong. To safeguard your investment as effectively as possible, you may find it beneficial to hire a business broker to mediate your sale and help protect your interests as you navigate your way toward the completion of a deal.
Business brokers can help in a variety of ways, from providing an accurate valuation of the business you wish to pay – thereby preventing the overpaying risk mentioned above – to drawing up non-disclosure agreements to protect sensitive financial information, and assisting with negotiations and due diligence.
From the opening stages of the acquisition to signing the final contract, business brokers guide you through the intricate nuances of the M&A process while helping to ensure the protection of your investment.
Safeguarding your acquisition with Harris Acquire
As a trusted UK business broker, Harris Acquire is perfectly positioned to help you buy a business that will provide a good return on your investment.
Our expert team will be on hand from the beginning, helping to locate and verify potential acquisition targets. From there, we can handle everything from valuations to negotiations, due diligence – and sealing the deal.
