PKF Carr & Stanton, Hastings, New Zealand
07 Apr 2016
By Michael Jackson - Director
As New Zealand’s business confidence has been rising over the past year, it is becoming clear that the business climate is ripe for growth by acquisition and we have been working with both sellers and buyers of successful businesses to ensure that our clients get the maximum value from the transaction. We expect that the desire by our clients to grow their businesses via acquisition will only increase so if you are considering this route to growth, here are some simple guidelines to consider.
What Is Due Diligence?When you are looking to acquire a business, the aim of due diligence is to assess the key issues facing the business you are looking to acquire and to confirm that your understanding of the target business is accurate. Typically, due diligence takes the form of a four stage process designed to minimise the transaction risks and maximise the value you gain from the transaction:
Stage One – Pre-deal evaluation to confirm if the target meets your acquisition criteria.Stage Two - Performing due diligence to analyse the target business in detail.Stage Three - Efficient deal structuring taking into account the tax risks and the accounting framework.Stage Four - Executing the deal ensuring that the issues identified during due diligence are factored into contracts appropriately.
Businesses seeking to grow via acquisition need a sound strategy to perform well in major transactions. Due diligence is seen as the cornerstone of successful deal management. To ensure that a transaction provides value to you as the purchaser, it is essential to identify risks and opportunities, including missing liabilities or potential synergies at the earliest possible stage.
Pre-deal evaluation: "Go / No Go" decisionThis should help you decide which transactions are worth pursuing. Once a potential target has been identified, a dedicated team of experienced professionals can:
The use of trusted external advisers (accountants, lawyers, financiers etc) are normally critical in any due diligence process. From our experience, to get the most from your advisers it is important to:
Due diligence: a rigorous analysisOur due diligence approach seeks to deliver a rigorous analysis of the target’s balance sheet, trading performance, assumptions and risks. This will include a detailed view of the target’s cash flows, which assist in pricing the acquisition and structuring the working capital requirements. The due diligence process should culminate in providing you with a risk focused report that:
With a third party managing the due diligence process, management is then freed up to focus on other aspects of the process (particularly where a lead adviser has not been engaged), such as negotiating with the vendor regarding price, obtaining bank financing for the acquisition and preparing documentation for shareholders regarding the transaction.
Structuring: minimise risk and maximise returnAccounting, tax and legal issues have a direct bearing on the value of the transaction for both the purchaser and the vendor. These issues impact the structure of the winning bid and sometimes even the viability of the deal itself. We recommend that tax issues be on the agenda at the first phase of the negotiation. The ability to create substantial tax savings often depends on early co-operation between the vendor and purchaser. Typically our team tailors the transaction structure to reflect geographic factors for each acquisition.
Executing the dealIssues identified throughout the due diligence process should be factored into the sale and purchase agreement to protect the purchaser against price movements and contingencies. Our team would usually review the contract prior to settlement to ensure that it makes sense from an accounting perspective. This saves significant management time and cost post-completion. During this stage we would advise you on other issues such as completion wash up mechanisms (to ensure that you get the asset base that you paid for) and earn-out structures to protect against forecast growth not eventuating as anticipated.
In post-completion we can also assist the purchaser to settle the net-asset position and would carry out a completion review to verify the existence and quality of the assets and liabilities acquired. This is undertaken to a much lower materiality and can result in significant cost savings through the price adjustment mechanism enshrined in the sale and purchase agreement.
It is important that any due diligence be planned, structured and focused on the key elements; otherwise the process can drift, wasting time, money and resources, and even result in a missed opportunity or a bad acquisition. They can also be very emotional processes, with both sides likely to experience moments of low and high morale. However, the more you plan and organise, the less painful and less expensive the process will be.
Michael Jackson is a Director of PKF Carr & Stanton and has undertaken many due diligence projects for clients. If you are considering an acquisition, please call Michael on 06 876 8124 for a no-obligation initial discussion about the risks and opportunities.
For more information on how our services can help your business get in touch.