Buying a competitor: 5 key areas to investigate
Having the opportunity to purchase a rival complementary business can be an effective way to grow your own business – potentially growing and diversifying your customer base, improving profit margins and perhaps acquiring some great assets and high-calibre people.
Here are our top 5 things you need to investigate and discuss with your legal advisers at an early stage in order to prevent legal problems.
Are the retiring sellers key to customer and vital supplier relationships?
If so, is there a deal to be done to keep them around, at least for a transition period? Should part of the purchase price be made contingent on customer retention after completion? Could it be potentially disruptive or difficult having the “old bosses” still around when trying to instil your business culture and integrate the business with your own – this is a common problem.
Are family members employed in the business and should they stay or go? What roles are likely to be duplicated with your existing employees? Where target business employees will be surplus to post-acquisition requirements, can terms be agreed for their voluntary departure on completion to avoid a disruptive and morale-sapping redundancy selection process after completion?
Are there other key employees of the target business with essential technical, customer or operational experience and know-how that you should incentivise to stay with some sort of “golden handcuffs” arrangement?
We would encourage you to seek our advice at an early stage on how best to ensure a smooth transition.
Customers and key suppliers
One of the major concerns is whether revenue will be lost following the transition of the customer base away from the methods and people they have been used to.
To what extent are customers contractually “tied in” and, if so, how long have you got to manage the handover of relationships before the contracts expire? Or does the proposed “change of control” provide customers with the right to terminate?
Are there key customers who are worth meeting before completion to seek assurances?
Do you have important customers who might not want to be supplied by a company that also supplies competitors of theirs?
Likewise, is the target business tied into using certain suppliers through long-term agreements when you would prefer to substitute your own (or vice versa), achieving economies of greater scale or purchase volumes?
There are various ways to incentivise the sellers and other relevant target company employees to assist with all this, which we can guide you through before settling on the right deal.
Key fixed assets
Ensure ownership of all essential intellectual property rests with the target business and is included in the sale – things like bespoke software, logos, web domains, website and other promotional material copyright and design rights, to give a few examples, are often, on investigation, actually in the hands of the sellers or the contractor who developed them.
As regards premises, vehicles, etc – do you want or need these?
If so, is there security of tenure? If not, can they be easily disposed of or a short-term lease be agreed upon with the flexibility to break if desired?
Other important operational assets may be leased or subject to finance leasing arrangements, so need to be investigated.
You will likely already have a good understanding of the regard in which the target business is held by customers, staff and others, but it is worth carrying out (with sellers’ consent) some customer and supplier referencing (often through a third party who provides this service) and check social media feeds and employment web sites for comments about the target business to ensure there are no signs of significant cultural or reputational problems.
Failing to check this might lead to a pre-existing reputational issue causing problems not only for the acquired business but (by association) your existing business.
In theory, if the target business’s revenue is maintained and costs can be streamlined across your existing and acquired businesses, profit margins should increase. However, there are pitfalls to look for and expert advice should be sought in this regard.
· Has the target business been run “on a shoestring” with an urgent need to upgrade or improve premises, equipment, computer systems, accounting functions, etc involving significant short-term expenditure and an ongoing profit impact?
· Will retiring sellers or other departing employees need to be replaced at a higher cost than they have historically taken in salaries?
· Are there costly (volume related?) rebates or similar deals with target customers which could retrospectively reduce margins?
· Does the acquisition take your business to a size where additional legal requirements apply or do “small company” advantages no longer apply? Tax, VAT, accounting and other compliance rules in a variety of areas can be more onerous for larger companies.
These are just a handful of the considerations you need to make before finalising your decision so it is imperative that you seek the advice of an expert law firm.
To discuss a business purchase or merger, contact our company and commercial team by calling 01792 450010 or email [email protected]