Plan Well and Be Prepared to Get the Right Value
Perhaps counter-intuitively, given the global pandemic and the resultant uncertainty in economies around the world, there has been a surge in the number of potential mergers and acquisitions and we are seeing our share of those.
So, what is happening here? Are these people nuts? Are they vultures looking to benefit from someone else’s misfortune?
In short, no. They are deals for mature businesses that make sense, strategically. They are deals that are consistent with the potential acquirer’s long-term strategy. They are deals that indicate that something that made sense pre-COVID, may well continue to make sense post-COVID.
And let’s face it, debt is still ‘cheap’ (if you can get it) and that ensures deals remain ‘affordable’.
What is clear is that during this period of significant and unpredictable change, both parties acknowledge the risk associated with calculating the purchase price by reference to historical earnings or predictions about future earnings.
Rather than being reflected in price, however, that risk is being accounted for in ‘deal-structure’. There are two main ways this is being done:
- Rises and falls in the sale price, calculated by reference to actual earnings in the years immediately following the transaction; and
- Purchasers withholding a percentage of the purchase price, subject to earnings materialising.
The flow-on effect is that vendors are often being locked-in to the business for longer periods after the transaction. This is as much a comfort for the vendor as it is for the purchaser. Vendors can see that one risk to future earnings is how the business is run, post-transaction and they are prepared to ‘stick around’ in an attempt to influence that.
If you are thinking about buying or selling a business, please give us a call.
It’s generally not something that happens overnight, so planning it well and being prepared are key to getting the right value.
We can help you with the strategy, financing, targeting, preparation, due diligence, negotiation, deal structure, tax advice and legal documentation.