Closing the deal
Buyers and sellers invest significant amounts of time and money to complete a business sale and acquisition.
A management team will address operational issues and integration plans, while financial and legal advisers complete due diligence as well as document and review sale and purchase agreements. This level of investment and the number of moving parts means that both parties need to have a firm and enforceable agreement to maximise the chance of a transaction proceeding. While both parties start with the best of intentions, in reality, many deals will fall over prior to reaching completion.
Assuming that the valuation and consideration terms are acceptable to the vendor in the non-binding indicative offer, the key steps where transactions will often break down are:
- Time – Delays in progressing the sale from the receipt of a non-binding indicative offer to transaction close is the biggest deal killer. Time provides opportunity for both parties to have second thoughts, and increase the emotions and tension of parties involved in the process. We have seen transactions fail as a result of changes in legislation, loss of contracts and other material adverse events following the agreement of key terms.
- Missing forecasts – The sale and due diligence process will often last a number of months. This time allows the purchaser to review the actual performance of the business against forecasts. If the forecasts are not being met, it will decrease the purchaser’s confidence in the ability of the business to meet earnings targets, and may give rise to revisions in the purchase price and/or structure of consideration.
- Inability to produce information in a timely basis – While it is recognised that the due diligence is completed on top of management’s day job, the inability to produce requested information quickly may result in the purchaser questioning the quality of information provided to date, and management.
- Surprises – Finding the proverbial skeleton in the closet, whether known or unknown to the seller during due diligence may result in the transaction being terminated.
- Culture – In conducting due diligence and interacting with the management team it may be discovered that the cultures of the two businesses are not aligned.
To address the time and cost impact on your business of a sale process, and minimise the risk of the transaction being terminated, vendors should:
- Plan thoroughly – The business should be prepared prior to marketing the opportunity. The preparation of an information memorandum and due diligence data room with anticipated information requests is also important to reduce the volume of questions and time delays during the sale process.
- Set realistic forecasts – Ensure that forecasts provided to purchasers are reasonable and achievable to provide confidence in management and the future outlook of the business.
- Be transparent – Be forthright with responses to the difficult questions. While the sale and purchase agreement will include warranties and indemnities, the integrity of vendor management, and the purchasers’ fear of the unknown are almost certain to kill the transaction.
- Assess purchaser funding capacity and investment committee approval – Confirm that the purchaser has all requisite approvals to enable it to complete the transaction.
- Engage experienced corporate and legal advisors – Your advisors will be able to drive the process, hold the buy-side accountable, and assist in addressing complex issues.
Comprehensive planning, decreasing perceived risks associated with the transaction, and minimising time delays are fundamental factors to closing the deal.
If you would like to discuss the purchase or sale of a business contact our Corporate Finance team in Sydney on (02) 8346 6000 or Newcastle on (02) 4962 2688, or click the button below.