The news has been full of articles about large corporates purchasing New Zealand businesses, but this is only the tip of the iceberg.  Attractive small to medium-sized New Zealand businesses have recently found themselves sought out as potential acquisition targets by larger corporates, both New Zealand and international, with most not making the news.  Your business could be one that is a tempting target.    

Having helped several large corporates to purchase businesses this year, there are a few areas which are worth highlighting. Taking the time to prepare for such a transaction will help with it proceeding smoothly and give a great first impression to the potential purchaser. It may even have an impact on value, as your business should be perceived to be well run and organised.

Timeframe

Be prepared for the fact that the acquisition is likely to take longer that you expect or would like! Initially you’ll start by signing confidentiality agreements and agreeing on key terms, and you may sign a non-binding heads of agreement or term sheet which summarises those broad areas. This part of the process alone can take a few months, especially if the acquirer needs to obtain overseas approval for the transaction. In the meantime, you need to keep focussed on running your business to ensure that performance doesn’t drop because you are distracted.

Once the due diligence process starts, where the corporate and their advisors are verifying information about your business, another 2-3 months are likely to quickly slip by. Ideally, you’ll also start negotiating the Sale and Purchase Agreement, so that once the due diligence is finished, you’ll be in a position to document any loose ends and complete the transaction. Again, you may need to allow time for overseas approval, for negotiating terms and potentially changing the structure of the transaction if the results of the due diligence are less than favourable. For example, it is common for part of the purchase price to be deferred pending key staff staying on, or performance hurdles being met. In all, expect a minimum 6-9 month timeframe from the start of negotiations to completion for a willing corporate buyer/willing SME seller scenario.

Documentation

As soon as you decide that you want to sell all or part of your business, start gathering the information which will be required to demonstrate its value. Your accountant can gather the relevant financial data, such as sales and profitability trends; debtor, creditor and inventory analysis; and explanations for any unusual transactions or trends. If you are contemplating a share sale, taxation data will also need to be collected.

You will also need key documents such as sales contracts and pipeline, key supplier contracts, leases and evidence of your IT systems. Evidence of your key management team’s tenure and skills, your payroll data and especially whether you have correctly accounted for employee leave. The leave data is an area that has the potential to be a speedbump for many transactions, as errors in leave calculations are very common.

Consider also how you can articulate the existing and potential value in your business. If you had access to additional resources, what would you change, what resources would be required (funds, skills, premises etc) and what would the expected outcome be? Also, what results would you expect to achieve given the status quo of product or service mix and staffing? Try looking at your business through the purchasers’ eyes and evaluate whether your past history supports your expectations.

Professional Advisors

Unless you already have experience in this area, using your professional advisors will be crucial to a successful outcome. The corporate acquirer is likely to be using high profile lawyers and accountants to conduct due diligence and negotiations. Involving your advisors at an early stage, and potentially engaging specialists who have experience in such transactions, can ensure that you are in the best possible position to secure favourable terms. You may have been using a family lawyer or accountant for many years, with a level of trust and deep understanding of your business. We’re not suggesting that you abandon them, but rather engage experts to work with them on key elements such as the due diligence and Sale and Purchase Agreement negotiations.

You may also want to consider calling on an experienced business broker to assist with negotiations, to act as an intermediary. This can be helpful if the situation is becoming tricky, as you may wish to preserve your future working relationship with the potential acquirer. In all likelihood, there will be at least a transition period where you will be required to act as consultant to the business to ensure a successful handover. If the transaction involves a deferred settlement, you will likely prefer to remain involved in the business to ensure that any performance goals are met.

Due Diligence Queries

Be prepared that the list of information required for due diligence from a corporate acquirer is likely to be extensive and far-reaching. Start preparing to populate a due diligence data room, so that if and when the transaction progresses, you are ready with much of the information requested.

The scope of the data required is likely to cover at least the following areas:

• Company structure and governance
• Financial data for 3 years and YTD
• Financial projections
• Customer and revenue data
• Marketing collateral
• Tax return data for up to 4 years
• Key contracts (customers, staff, premises, banking, leases)
• Details of past and ongoing litigation
• Employee details and key data
• Data for vehicles, machinery and other assets
• Intellectual property, such as patents or trademarks
• Details of insurances
• Health & safety records
• IT systems details

Once the corporate’s advisors start to work through the data provided, be prepared for questions and assemble a team to respond efficiently for each area. Establish some guidelines depending on your available resources, for example you may want to ask for at least a 2-3 day turnaround to deal with any queries. You may also want to use your advisors to check information being uploaded to the data room, in order to minimise areas for confusion.

Consider that all of the information that you are providing may be used to support renegotiating terms or drafting warranty provisions.  As such, you may want to consider how you can mitigate any demands. For example, if a key customer contract is due to expire shortly, is there potential to negotiate an early renewal. What incentives may need to be offered to retain key staff?

Post-completion

Once the transaction is completed, be prepared to work with the new owners on integrating the business with their existing operations. Reporting requirements are likely to be more extensive, in terms of coverage (financial, forecasting, operations, staffing and strategy), and timeframes (monthly reporting within a few days of month end). There will be a need to clarify delegated authorities, approval processes and operating procedures.

Financial reporting in particular can be onerous, as the corporate may be reporting using International Financial Reporting Standards, so there may be a requirement to transition to these post-acquisition with changes in accounting policies.

If you have sold your business assets, you may require advice on winding up your current ownership structures. Similarly, financial advice on investing the sale proceeds may be helpful.

Overall, the benefits of releasing equity, and having access to resources through being part of a larger organisation, are likely to far outweigh these short-term issues. Think of the problems that arise as speed bumps on the road towards future growth and security.

If you would like any further information, contact your usual advisor.