Corporate acquisitions - think outside the box and you could scoop up a bargain

If you have your eye on acquiring another company there’s no doubt that this is a good time to buy and that there are bargains to be had as the economy slowly recovers. The problem for many is putting the funding in place. But that doesn’t mean that only those with cash in hand can take advantage of the market.

Troy Warner, Partner of our Business team at Geoffrey Leaver Solicitors says: “If people are willing and able to use a little imagination as to how they are going to finance an acquisition it is often still possible to get the deal done.

“It is true that, compared to three or four years ago, large amounts of funding from the big high street banks tends not to be an option. This is not a problem where prospective buyers have their own funds and can pay a reasonable proportion of the purchase price up front; it puts them in a strong bargaining position. But do those not in this happy position have to miss out?” The answer is no; with professional support and careful planning there are several alternatives that can be very successful.

First, many banks and finance companies are still willing to lend in respect of asset based transactions. For instance Geoffrey Leaver has recently been involved in the acquisition of a large printing company in the South East of England where a significant proportion of the funding came from the factoring of the target company’s own debts plus the sale and lease back of various items of plant and machinery that it owned outright.

OK, this type of financing does tend to make the transaction more complex but it can produce the desired result.

The other significant trend in corporate sales and purchases is the greater reliance on some form of “earn out” payment where part of the purchase price depends on the performance of the target company post-acquisition.

“We have recently been involved in the sale of a chain of photographic studios in London” says Troy. “The buyer was willing to pay a premium price for the business subject to it continuing to perform well over the next 12 months. The advantage from the buyer’s point of view is that in effect it is able to fund that part of the purchase price out of future profits but will only pay a reduced amount if the business fails to perform. If the business does perform well then the sellers are likely to receive significantly more than if the whole purchase price is paid up front.”

However the problem with any sale that contains an element of earn-out is putting in place sufficient legal and practical provisions to enable the sellers to keep some control over the way the business is run during the earn-out period. Naturally buyers want to acquire the business free from restrictions so contentious issues can arise: both sides will need to take detailed advice from their team of lawyers and accountants.

Another interesting type of transaction that is becoming more common Troy describes as ‘assisted management buy out’.

Members of an existing management team are often the people most interested in buying a business from its owners but often do not have a much in the way of funding. Over the past few months Geoffrey Leaver’s corporate team has been involved in a number of management buyouts where the seller has been willing to give considerable assistance to the management team to let the buy-out proceed.

“For example we have recently acted for a management team in their buy-out of a large distribution and servicing company in the bioscience industry”, says Troy. “The owners were keen to sell and concentrate on their other core businesses and they were prepared to give significant assistance to the management team to enable the sale to go through. This took the form of generous extended payment terms with the managers taking on no personal liability.

“In fact, within a short time of buying the business the management team has found a supplier willing to make a large investment into the business. This means the management team members are likely to achieve an immediate profit on the amount they paid for the business while still retaining a senior role and equity holding.”

If you are looking to buy or sell a business and would like a chat with Troy or Tim on either a formal or informal basis they can be contacted on 01908 692769 or by email at twarner@geoffreyleaver.com or troberts@geoffreyleaver.com.