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TRADE SECRETS OF BUSINESSACQUISITIONS
Barrie Pearson
A Thorogood Special Briefing
IFC
TRADE SECRETS OF BUSINESSACQUISITIONS
Barrie Pearson
A Thorogood Special Briefing
Thorogood Publishing Ltd
10-12 Rivington Street
London EC2A 3DU
t: 020 7749 4748
f: 020 7729 6110
w: www.thorogoodpublishing.co.uk
© Barrie Pearson 2007
All rights reserved. No part of this
publication may be reproduced,
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This Special Briefing is sold subject
to the condition that it shall not, by
way of trade or otherwise, be lent,
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No responsibility for loss occasioned
to any person acting or refraining
from action as a result of any
material in this publication can be
accepted by the author or publisher.
A CIP catalogue record for this
Special Briefing is available from
the British Library.
ISBN 1 85418 366 4
978-185418366-8
Printed in Great Britain
by Marston Digital
Other Titles fromThorogood Publishing
Corporate Governance: Guidanceon accountability requirements
David Martin FCIS FCIPD FIoD
Discrimination Law andEmployment Issues
David Martin FCIS FCIPD FIoD
Effective Recruitment: A practicalguide to staying within the law
Professor Patricia Leighton and
Dr Giles Proctor
Employee Sickness and Fitness for Work
Gillian Howard
Employment Law Aspects ofMergers and Acquisitions
Michael Ryley
Strategic Customer Planning
Alan Melkman
Tax Planning for Businesses and their Owners
Peter Hughes
Waste Management: The changinglegislative climateCaroline Hand
Special discounts for bulk quantities of Thorogood books are available tocorporations, institutions, associations andother organisations. For more informationcontact Thorogood by telephone on 020 7749 4748, by fax on 020 7729 6110, or email us: [email protected]
The author
Barrie Pearson is chief executive of Realization. The company provides world
class mentoring and coaching for chief executives and entrepreneurs about to
embark on the acquisition trail, and to help them groom a business as the first
step in making a disposal through until the consideration is paid to them.
After university, Barrie worked for Dexion Comino International, The Plessey
Company and The De La Rue Company, acquiring and managing companies
in the UK, mainland Europe and the USA.
In 1976, he founded Livingstone Guarantee plc, the first corporate finance
boutique in the UK, advising on acquisitions, disposals, management buy-outs
and buy-ins, fund-raising and stockmarket listings. When he sold it, the company
had become the largest and most successful independent corporate finance house
in the UK.
He has written seventeen books, in his spare time, including Trade Secrets of
Business Disposals which was published recently by Thorogood. He has presented
seminars on acquiring and selling companies in the UK, Europe, New Zealand
and the Far East.
He is Chairman of Precision Corporate Finance which is headed up by Neil
Ackroyd, a former colleague in Livingstone Guarantee.
Barrie can be contacted by email at [email protected] or by
telephone on 01296 613828.
iiiA THOROGOOD SPECIAL BRIEFING
Preface
This Special Briefing distils nearly 40 years of my deal-making, both as a principal
and a corporate finance adviser, to reveal the trade secrets which are rarely written
about and to spell out the hard truths about the avoidable traps executives and
professional advisers often fall into.
Group executives and business owners thinking about making an acquisition
will gain invaluable insights into achieving the best possible deal, and ensuring
effective post acquisition management from the outset. Equally, people contem-
plating a sale of a business will benefit from understanding the process from
the acquirers standpoint, as well as their own.
Professional advisers are acutely aware of the effort needed to make a pitch to
win an assignment, especially in a beauty parade, and their success rate may
well be less than 25%. By a better understanding of what clients want from their
advisers, and important details which lose assignments, the outcome will be a
higher rate of winning assignments and more deals completed for their clients.
This Special Briefing is laced with proven tactical advice to ensure that deals are
completed, because losing a deal by adopting the wrong tactics is unforgivable.
Although I am a qualified accountant, it is people handling skills rather than
financial analysis which win or lose deals.
Yet again, Claire Sargent has made time to word process this manuscript whilst
doing a demanding full-time job.
Barrie Pearson
REALIZATION
Campbell House
Weston Turville
Bucks HP22 5RQ
TRADE SECRETS OF BUSINESS ACQUISITIONS
iv A THOROGOOD SPECIAL BRIEFING
Contents
1 REALITY, STRATEGY, OPPORTUNISM AND THEORY 1
Most acquisitions underperform ...............................................................2
Safer and risky acquisitions........................................................................2
Kissing frogs is essential.............................................................................4
Commercial due diligence is vital ..............................................................5
Opportunism is a must................................................................................5
Mergers should never happen – well, hardly ever...................................7
Stock market listed acquisition targets .....................................................8
2 WHAT BUYERS SHOULD SEEK… AND AVOID 9
Management continuity is a key issue.....................................................10
Consistent sales and profit growth history are valid comfort ..............12
Sales and profit forecasts must be robust...............................................13
Demonstrable cash generation is a major plus ......................................13
Realizable surplus assets are a plus factor..............................................14
Tax and VAT need to be clean ..................................................................14
Undue customer or supplier dependence is a potential risk ...............14
Major customer contracts due for renewal are a cause for concern....15
Relocation may be a plus or a minus.......................................................15
3 DEVELOP YOUR STRATEGY INTO AN ACQUISITION PROFILE 17
Strategy needs focus .................................................................................18
Evaluate alternatives to acquisition.........................................................19
Organic growth..........................................................................................19
Trading agreements...................................................................................20
Strategic alliances......................................................................................21
vA THOROGOOD SPECIAL BRIEFING
Minority equity stakes...............................................................................22
A joint venture or consortium..................................................................23
A majority equity stake .............................................................................24
Performance-related deals........................................................................24
Assess the likely number of acquisition targets .....................................25
Write an acquisition profile to focus your acquisition search..............26
Maximum cash available for acquisition ................................................27
4 FIND RELEVANT TARGETS AND WOO VENDORS 31
A UK in-house search – initial stages ......................................................32
Be wary of using external advisers..........................................................33
An in-house UK search – main search ....................................................35
Don’t just contact vendors, woo them from the outset .........................36
The initial meeting with the vendors.......................................................37
The key meeting to obtain streetwise information from the vendors....39
An overseas search....................................................................................40
5 USE COMMERCIAL COMMON SENSE TO VALUE A BUSINESS AND MAKE AN OFFER 43
Adjusted profit history and forecasts are vital .......................................44
Quantify major cost rationalization opportunities.................................47
Calculate the adjusted net assets .............................................................48
Use your own adjusted profits for valuation .........................................49
Structure the offer to reflect vulnerabilities ...........................................51
Discuss your offer face-to-face with the vendors ..................................52
6 NEGOTIATE THE DEAL AND SIGN HEADS OF AGREEMENT 53
Negotiate the Heads of Agreement .........................................................54
Earn-out deals need defining ..................................................................58
Warranties and indemnities need to be negotiated ..............................60
Fix the maximum liability of the vendors................................................60
TRADE SECRETS OF BUSINESS ACQUISITIONS
vi A THOROGOOD SPECIAL BRIEFING
Joint and several liability for vendors .....................................................60
Agree the basis to trigger a warranty claim against the vendors........61
7 STEER THE DEAL SAFELY TO LEGALCOMPLETION 63
Effective commercial due diligence is vital .............................................64
Environmental due diligence needs to be done on every deal .............65
Financial due diligence must include profit forecasts
and the order book ....................................................................................66
Pension due diligence................................................................................67
Legal due diligence should include contractual issues
and regulatory compliance .......................................................................67
Assess the disclosure statement by the vendor
and negotiate changes ..............................................................................68
Prepare to announce the deal internally and externally........................68
8 POST ACQUISITION MANAGEMENT: TURN AROUND LOSS MAKING COMPANIESEFFECTIVELY AND QUICKLY 71
Make an initial impact ...............................................................................72
Set up reporting relationships and authority limits...............................75
Establish clear rules for handling the media ..........................................75
Keep head office interference to a minimum..........................................75
Get an overview of the business ..............................................................76
Start with the sales team...........................................................................76
Scrutinize overhead and administration costs .......................................78
Tackle production and procurement costs… and opportunities ..........79
Set relevant short-term forecasts and objectives...................................80
Financial planning and control need clear priorities ............................81
Create a budget for the new financial year.............................................81
Examine research and development .......................................................82
Address the medium-term future for the business................................83
Make redundancies urgently and humanely ..........................................85
CONTENTS
viiA THOROGOOD SPECIAL BRIEFING
9 UTILIZE EXPERT STREETWISE TACTICS 87
Discuss the structure and form of consideration
before making a written offer ..................................................................88
Realize that too low an initial offer may lose the deal ...........................89
Reveal any onerous conditions early to reduce their impact................90
Spell out and sell your management approach......................................90
Recognize that your conduct prior to completion is crucial.................91
When negotiating the final deal it is unlikely that
the vendors can justify a higher offer .....................................................91
Criticizing the business to the owners must be avoided.......................91
Quid pros quos are an effective way for win-win negotiation .............92
When no agreement is reached, keep the door open............................92
10 CHOOSE AND APPOINT ADVISERS WITH CARE 93
Identify the help and advice you need and want ...................................94
Recognize the advice and help which is available .................................96
Create an effective beauty parade to select advisers.............................97
Always agree fees and negotiate the engagement
letter before appointment .........................................................................98
Telephone references on individual advisers really are valuable .........99
Ensure advisers keep you informed of progress ...................................99
TRADE SECRETS OF BUSINESS ACQUISITIONS
viii A THOROGOOD SPECIAL BRIEFING
Chapter 1Reality, Strategy, Opportunism and Theory
Most acquisitions underperform
Safer and risky acquisitions
Kissing frogs is essential
Commercial due diligence is vital
Opportunism is a must
Mergers should never happen – well, hardly ever
Stock market listed acquisition targets
A Thorogood Special Briefing
Chapter 1Reality, Strategy, Opportunism and Theory
Your acquisition strategy must be firmly rooted in reality, opportunism is needed
to complete deals, but theory is a waste of time.
Most acquisitions underperform
The stark reality is that well over 50% of acquisitions underperform compared
with pre-deal expectations, as judged by the acquirer with the benefit of hindsight.
This is based on research carried out over the past 25 years from a variety of
studies around the world. Press articles underline this evidence by reporting
profit warnings which reflect underperformance from many acquisitions
Safer and risky acquisitions
Tangible evidence, rather than theory, offers an insight into safer acquisitions
and risky bets, but there is rarely ever guaranteed success.
Market leadership or increased market share
Over many years there is clear evidence that the market leader is likely to be
the most profitable in the sector. So acquisitions which enable a company to
achieve market leadership in the existing segments and territories already served
should be regarded as safer, provided there are no anti-monopoly problems and
the pursuit of diminishing returns will be avoided.
Similarly, increased market share is a valid goal, particularly for a company to
become one of the three largest players in the sector. This means that prospec-
tive customers are likely to be motivated to find out what you offer because of
your visibility in the sector. Similarly, if the market leader is allowed to dominate
the market, the number two and three players have legitimate concerns. So there
TRADE SECRETS OF BUSINESS ACQUISITIONS
2 A THOROGOOD SPECIAL BRIEFING
is sense in, say, the number two and three coming together to create a more
serious competitor.
Acquire a niche business
Niche businesses, which are relevant to your strategy and are market leaders
in their segment, often prove to be robust acquisitions. The reasons are that their
market share will continue to provide the momentum needed post-acquisition,
and the smallness of a niche market means that other companies are unlikely
to enter the segment.
An example is an international support services company that entered the hospital
trust car park management segment by acquiring the market leader in the UK,
and this helped them to expand geographically as well.
Broaden the product or service range
The rationale for this approach is to achieve more of a one-stop offering to
customers and clients, and benefit from cross-selling opportunities for other
services. An example could be that a marketing services group acquires a public
opinion survey company. Many companies have found, however, that it is much
more difficult than expected to realize cross-selling benefits.
To enter an important distribution channel
In recent years, supermarkets have carved a significant market share in selling
wines and flowers. Likewise, some supermarkets have built up sizeable chains
of small outlets serving local communities and inner city neighbourhoods. The
route has been several acquisitions of local store chains, because it would take
far too long to obtain planning permission and build new outlets or to acquire
leasehold premises piecemeal.
To secure a key supplier
Some companies are highly dependent on one supplier to provide a continuing
source of supply. Whilst it can be argued that a second source should have been
developed years ago, the reality now is that if a competitor acquired this vital
source of supply it could cause serious problems. On the other hand, when a
key supplier is acquired, other customers will seek alternative sources. Conse-
quently, there needs to be a strong case to protect a key supply by acquisition.
1 REALITY, STRATEGY, OPPORTUNISM AND THEORY
3A THOROGOOD SPECIAL BRIEFING
If an important supplier approaches your company to acquire a minor equity
stake, perhaps coupled with a loan, my advice is not to invest in these circum-
stances and instead to find or develop another source of supply urgently.
To provide cost rationalization opportunities
Cost rationalization as a benefit of acquisition seems attractive. For many
acquirers, however, unlocking synergy has proved to be as difficult as spotting
the Loch Ness monster on a dark and foggy night. Successful delivery of post-
acquisition synergy needs to be based on identified savings pre-deal! It is not
enough to guesstimate that head office costs will yield a 20% reduction across
the board. Specific individuals need to be identified and other savings rigor-
ously evaluated.
Overseas acquisitions
The highest risk category of acquisitions is probably overseas acquisitions.
Anyone considering an acquisition of a company in a new market sector in a
country where there is no existing subsidiary, should first of all learn to walk
on water at the local swimming pool; in other words – forget it!
The lowest risk category is to acquire a bolt-on acquisition for an existing
subsidiary overseas. Intermediate risk categories to extend geographical cover
are to acquire a business in an adjacent market segment in a country with an
existing subsidiary, but to acquire a similar business overseas in a country without
an existing operation is a higher risk.
Kissing frogs is essential
Some years ago a listed company told me that 12 unquoted companies had been
acquired within two years and in every case the vendors made the initial approach.
No other acquisitions had been identified. This stemmed from a new chief execu-
tive determined to consolidate a fragmented sector. Within a further three years
the group was put into administration. The financial director told me that the
board was flattered by these unsolicited approaches. The reality was the private
vendors recognized a lucrative band wagon for them and jumped aboard. The
company overpaid significantly, did inadequate due diligence and made a mess
of integrating the businesses acquired.
TRADE SECRETS OF BUSINESS ACQUISITIONS
4 A THOROGOOD SPECIAL BRIEFING
In stark contrast, the most successful acquirers I have been privileged to advise
probably considered at least ten targets, in a differing amount of detail, for every
acquisition completed. In other words, they know that kissing frogs is a must!
Commercial due diligence is vital
The single most frequent cause of an underperforming acquisition is that the
acquirer took the commercial well-being of a target company on trust. The vendors
sales pitch was enough to hook a deal. Ten years ago many acquirers ignored
commercial due diligence, and some still do today. Private equity houses, however,
are committed to commercial due diligence as a matter of routine.
Accountancy firms have an established track record in providing financial and
tax due diligence, and many now offer commercial due diligence as well to
maximize their fee income from a deal. Too often it is done by people who are
resprayed auditors, as I call them, who lack commercial insight. Fortunately,
specialist firms now provide commercial due diligence.
Some of the issues where commercial due diligence is appropriate includes an
investigation of:
• customer satisfaction, compared against competitors
• the awareness and reaction of non-customers to the target company
• the distribution channels used, compared with rapidly growing,
mature or declining channels
• the standing of the company as a potential employer
• the anticipated impact of technology on the sector and the target company
The key to commercial due diligence is to identify and focus on those issues which
are most important for the future success of the particular target company.
Opportunism is a must
It may seem to be a contradiction that my message is all about a measured and
rigorous approach to every acquisition, and yet I regard opportunism to be a
must. There is no contradiction whatsoever. Relevant acquisition targets decide
when they wish to sell and you may be made aware of a sale by the corporate
1 REALITY, STRATEGY, OPPORTUNISM AND THEORY
5A THOROGOOD SPECIAL BRIEFING
finance adviser acting for the vendors. Provided that acquisition criteria have
been formulated, preferably in the form of a written Acquisition Profile
(described in Chapter 3) it will be easy to judge the relevance and importance,
or not, of the target company for you. The timing of the vendors may conflict
with your budgetary season, or whatever, so be it! Nonetheless, you need to pursue
the opportunity.
I know of one chief executive who reacts differently. He is always on the look
out for a bargain deal and commits resources to pursue every deal which crosses
his desk. As a result, there is a massive waste of management time because there
is no focus and he rarely ever completes a deal.
Receivership opportunities are another potential time waster. Within two days
of the announcement of receivership, the receiver may announce that about sixty
expressions of interest have been made. Only a handful of prospective acquirers
will be invited to meet the receiver, and they will be expected to respond as a
matter of urgency. So, first of all, decide that the opportunity really is relevant
before making any contact.
If the business is acquired from receivership, management must be injected from
the outset. It is absolutely naïve to think that installing a good finance director
will restore success. A stand-alone business requires a full-time chief executive
and a finance director, and there is no substitute for a chief executive with
successful turn-around experience.
A controlled auction of a business may prove to be a major time wasting exercise.
The first step is to understand the typical controlled auction process:
• The sale of a business, usually a division or subsidiary of a group rather
than a private company, will be announced in the press by a news article
and not by an advert.
• In addition, the corporate finance advisers may contact selected bidders
at home and overseas to make sure that people are aware of the
opportunity.
• Prospective purchasers will be required to make a written offer, typically
within four to six weeks, and without any contact with the management
team. The offer needs to be made purely on the lengthy information
memorandum prepared by an accountancy firm on behalf of the
vendors.
TRADE SECRETS OF BUSINESS ACQUISITIONS
6 A THOROGOOD SPECIAL BRIEFING
• Up to 25 offers may be received, and these will be reduced to five or
six – and may include an MBO from the management team or private
equity players acting as principals.
• The short-listed bidders will be given access to an on-line ‘data room’,
and invited to carry out the bulk of their due diligence and to meet
the management team. Often the vendor will release the draft Share
Purchase and Sale Agreement to be used.
• Typically only about two or three weeks will be allowed to submit a
final offer, which may be higher or lower than the initial offer.
• Usually two bidders are selected, with one of them ‘kept warm’ in reserve,
and the aim is to rapidly complete any outstanding due diligence and
to have final negotiations prior to legally completing the purchase.
The fundamental difference compared with the usual sale process is the timing
of due diligence.
In a controlled auction, a substantial amount of due diligence needs to be done
prior to the second round of offers. This requires not only in-house manage-
ment resources, but costly work which needs doing by third parties and you
may not be selected to go forward as one of the two preferred bidders.
In contrast to the usual sales process, Heads of Agreement are signed and a
period of exclusivity given to the prospective purchaser to carry out due diligence
and complete the deal.
Consequently, the risk of abortive management time and due diligence fees is
much greater in a controlled auction. So there is a clear cut message – do not
enter a controlled auction unless the target really is relevant for you and you
believe that you are well placed to be successful.
Mergers should never happen – well, hardly ever
Probably only one in ten merger attempts result in a completed deal. Why? The
two companies simply fail to agree on the split of the equity. Merger attempts
often start out in an amicable way, because the people involved have ‘known’
each other for years, and end in recriminations and annoyance that so much
management time and advisory fees have been wasted.
1 REALITY, STRATEGY, OPPORTUNISM AND THEORY
7A THOROGOOD SPECIAL BRIEFING
Two issues need to be agreed at the outset:
• the split of equity, which may require one party to inject cash or extract
it, to achieve the desired split; and
• the top management structure agreed by job definition and choice of
individuals. It is nonsense to even think of joint managing directors,
joint marketing directors or whatever. There will be too many
directors and some will need to leave.
Only when the equity split and management team have been agreed, should
advisory fees be incurred. An awful situation is where each party appoints corpo-
rate finance advisers to value both businesses or to recommend the equity split
and any cash adjustment needed. Worse still, I know of cases where each party
rejected the proposal and agreed to have a third advisory firm, and yet more
fees, to decide what is fair. Even this may well result in deadlock.
Stock market listed acquisition targets
Failed attempts to acquire a listed company are expensive and the ensuing press
coverage may be adverse. If the bid is to be hostile, higher bids may be triggered.
When a bid approach is made on an expectation of an agreed offer, the likeli-
hood of success is greater but other bidders may still come forward.
My advice is not to attempt a hostile bid unless there is a compelling commer-
cial rationale and a rigorously evaluated likelihood of success.
Whether friendly or hostile, however, an investment bank should be appointed
to advise well before any approach is made. Stock exchange regulations require
a ‘standard’ timetable to be followed and careful handling of the transaction to
ensure that the correct procedures are followed, so these situations are outside
of the scope of this Special Briefing.
TRADE SECRETS OF BUSINESS ACQUISITIONS
8 A THOROGOOD SPECIAL BRIEFING
Chapter 2What buyers should seek…and avoid
Management continuity is a key issue
Consistent sales and profit growth history are valid comfort
Sales and profit forecasts must be robust
Demonstrable cash generation is a major plus
Realizable surplus assets are a plus factor
Tax and VAT need to be clean
Undue customer or supplier dependence is a potential risk
Major customer contracts due for renewal are a cause for concern
Relocation may be a plus or a minus
A Thorogood Special Briefing
Chapter 2What buyers should seek…and avoid
It is so easy for commercial commonsense to go out of the window amid the
excitement of a winning a deal. Any idea of winning or losing is totally out of
place. Crazy though it is, I have known directors to calculate the amount of synergy
required to gain investment committee approval. I repeat that synergy must be
based on identified and deliverable action, with the realization that many acquirers
have discovered that unlocking synergy will result in significant additional costs
initially and take longer than expected.
An example of so-called tangible and deliverable synergy is where both the
acquirer and the vendor have a national sales force serving the same market.
Imagine that the combined sales force add up to 130 people, and it is agreed
that 100 will be ample for the merged operation. The evaluation required involves:
The 30 people to leave are identified, together with the redundancy payments
necessary. This is likely to be a significant one-off cost.
As a result of overlap or underlap of individual territories some people will need
to be persuaded to relocate, with the ensuing one-off cost of relocation and the
likely cost of an improved package as a ‘sweetener’.
Additionally, basic salaries, incentives for sales achieved, allowable expenses
and company cars will need to be harmonized. Invariably, this requires harmo-
nizing upwards rather than downwards.
Management continuity is a key issue
On numerous occasions the acquiring team has told me that the owner-direc-
tors of the target company were not ‘professional’ managers. Exactly right! But
it misses the point completely. They were entrepreneurs, with a highly devel-
oped commercial instinct based on many years of hands-on experience and
knowledge of the market sector.
TRADE SECRETS OF BUSINESS ACQUISITIONS
10 A THOROGOOD SPECIAL BRIEFING
Their concerns are likely to be motivating staff to share their own passion for
the business, winning new business, staying close to existing customers and
experimenting with new product or service ideas. Formal five year business plans,
investment appraisals for capital expenditure and suchlike may be non-existent
or rudimentary at best. So what? These can be introduced later, hopefully without
losing too much of the entrepreneurial flair.
It is vital to understand what the owner-directors contribute to the business and
how they spend their time. Wiley owner-directors wishing to leave the business
as soon as possible after legal completion, will understate their own value. And
don’t be fooled if an internal candidate was promoted to ‘managing director’,
shortly before a sale was initiated, probably on the suggestion of the advisers
grooming the business not just for sale, but for a quick personal exit as well.
The importance of owner-directors may not be obvious. One target company
received over 40% of total sales from one blue chip customer. The owner-director
said that the account ran like clockwork because of the care and attention of
many staff. He ‘forgot’ to mention that the procurement director sailed regularly
on his luxury yacht. In another case, senior staff retention was outstanding in
contrast to the sector as a whole where staff turnover was high. The reason?
The owner-director was truly inspirational and had built up massive staff loyalty.
In another case, an insurance broking business employed about 100 staff including
a dedicated sales force. The reality? The three owner-directors won more than
80% of new business, and the sales force concentrated on ‘maintaining and
servicing’ customers.
The most critical period for a newly acquired business is the first few weeks
and months. Even mildly dissatisfied customers may decide to have a second
supplier or to invite other suppliers to pitch for the business. Staff are likely to
be nervous and suspicious, perhaps wrongly assuming the risk of redundancy.
So, unsolicited job offers and attractive job adverts may be tempting. Eradicating
a company name may cause greater upheaval than ever expected. In Living-
stone Guarantee, the name meant a lot to staff at all levels, and I was delighted
when the acquirer deciding not only to maintain the name, but brought their
much larger corporate finance division under our name and management control
as well.
In certain circumstances, the key issue may be to lose the top management just
as soon as possible. For example, when an international contract caterer acquires
a regional business, the commercial rationale will be to fold the acquired company
into the existing regional management, and to lose not only the owner-direc-
tors but quite a lot of other staff and the premises as well.
2 WHAT BUYERS SHOULD SEEK… AND AVOID
11A THOROGOOD SPECIAL BRIEFING
Consistent sales and profit growth history are valid comfort
Your reaction may well be that this is comparable to driving a car using only
rear view mirrors. Not at all. I passionately believe that the three previous years
performance of a target company must be understood and analyzed.
It is commonplace for an Information Memorandum to show the adjusted profit
before tax, possibly with the adjustments merely mentioned as footnotes. This
can be misleading when vendors take a liberal view of valid adjustments.
Some one-off events are valid, for example, a substantial bad debt when a ‘blue
chip’ customer suddenly crashed or the revenue costs of moving office. Others
are not. The cost of hiring, say, a managing director who was dismissed within
months is a management mistake. Executive search fees, the salary paid and
the leaving package are not valid adjustments. Similarly, if an owner-director
is to retire at legal completion, the total employment costs should not be ‘added
back’, if the person is to be replaced by hiring a lower cost person. Even then
the net adjustment should only be made to future projections.
One-off events may have boosted sales and profits. For example, the introduc-
tion of new health and safety legislation may have boosted not only the previous
years performance, but the current year as well. Similarly, the company may
have won a one-off contract with, say, a Middle East customer which will come
to conclusion during the next few months because the project will be completed.
The essential step is for the acquirer to produce a separate adjusted sales and
profit history which, reflects any extra costs which would have been incurred
as a group subsidiary. For example, the level of insurance cover may be regarded
as inadequate or key staff may be being paid well below market rates.
The adjusted sales and profit figures establish the level of sustainable profit which
is the platform for future projections. If the vendors have overstated the adjusted
figures, then the forward projections could be overly ambitious unless amended
by the acquirer.
If the adjusted figures reveal significant swings in sales and profits, the reasons
must be understood. The rapid recovery from a previous years loss to a healthy
current year profit, may have been deliberately boosted by overstating provi-
sions and releasing unnecessary provisions in the current year.
TRADE SECRETS OF BUSINESS ACQUISITIONS
12 A THOROGOOD SPECIAL BRIEFING
Sales and profit forecasts must be robust
Vendors are prone to make ambitious forecasts for the current year and the next
two years to maximize the valuation.
Some acquirers respond by attacking the forecasts and attempting to get the
vendors to reduce their projections, but it is highly unlikely they will agree and
the rapport between both sides could be soured. My advice is to:
ask the vendors to explain the basis of their forecasts and the underlying reasons.
If the forecasts are over optimistic, say so and explain why politely;
then the acquirer should compile his own forecasts and base the valuation on
them, taking into account any additional costs as outlined earlier.
Overstated forecasts by vendors may be based on an arbitrary, say, 15% annual
compound sales growth largely without any tangible reasons. Similarly, fixed
cost projections may remain virtually unchanged despite the fact that sales are
projected to increase substantially. My experience is that so called fixed people
costs are remarkably variable.
Demonstrable cash generation is a major plus
A profitable company will not necessarily survive. Survival is dictated by cash
flow generation. Namely, the ability to pay invoices and not to exceed an overdraft
limit which causes the bank to impose penal sanctions. An overdraft is renew-
able annually and repayable on demand. Never forget that.
A management buy-out is financed by a lot of debt and the bank will impose
covenants for the ‘cover’ of interest payable by profit. Failure to operate within
the covenanted limits set by the bank will bring a swift and tough response.
In contrast, a consistently cash generative business is a joy to own. An excel-
lent example is a subscription magazine, where the annual subscription is often
collected by direct debit before the first issue is delivered! Many other service
companies are inherently cash generative too, because sizeable cash deposits
are payable on placing the order.
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13A THOROGOOD SPECIAL BRIEFING
Realizable surplus assets are a plus factor
A freehold warehouse may soon become vacant by using available floor space
within the group. The cash flow benefit must reflect a realistic view of market
value and saleability, agents fees and the time needed to complete a sale.
If there are unwanted items of equipment and redundant stock, it makes sense
to sell them to release floor space and to help good housekeeping, even though
the cash realized may be modest.
Tax and VAT need to be clean
It would be naïve to regard tax and VAT to be a non-issue because the vendors
will be obliged to provide a full indemnity for any unexpected liabilities up to
legal completion. Accounting fees to handle issues which arise will be covered
by the indemnity, but there is likely to be significant in-house management time
involved as well.
Ideally, the vendors will have ensured that up-to-date tax and VAT returns have
been submitted and agreed. If there is an Inland Revenue investigation pending
or in progress this should be cause for concern. An investigation may start on
a seemingly limited basis, but it will be widened in scope as necessary. Further-
more, two years may be needed to reach final agreement with the authorities.
Unless part of the purchase consideration is to be held in an escrow account,
there is always a risk that it may prove difficult to get payment from the vendors.
By then, the cash received may have been given to the next family generation
or placed in an obscure Liechtenstein based trust, or whatever.
Undue customer or supplier dependence is a potential risk
There are cases where one customer accounts for more than 70% of total sales
in the target company. The vendors are likely to stress that the account has grown
annually for the past twenty years. So be it, but it is cold comfort. The customer
may be taken over and a rationalization of suppliers implemented.
It is quite commonplace in service companies that, say, the five largest clients
will account for 80% of the total sales. If any one of these is lost the company
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14 A THOROGOOD SPECIAL BRIEFING
may be plunged into loss, and it is unlikely that cuts can be made in fixed costs
to offset completely the loss of gross margin.
Supplier dependence may pose a real threat. I have come across cases where
there is a no written agreement at all, because the two parties could not agree
the wording but the target company was ‘assured’ that they would have an exclu-
sive supply agreement for as long as desired. Recent face-to-face contact with
the supplier may have been occasional at best. The source of supply could be
China, Thailand or Cambodia, or wherever. Without an adequate written contact,
however, the source of supply may switch to other customers and exclusivity
will be lost.
Major customer contracts due for renewal are a cause for concern
Many facilities management supply agreements are based on a fixed period of
between one and seven years. If a major customer contract is due for renewal
within a few months there is legitimate cause for concern. The answer might
be to wait until the contact is renewed before legal completion, but by then another
major contract renewal may be imminent.
Worse still, some of these contracts give the customer the right to terminate
the contract prematurely at, say, three months notice. Some comfort may be
achieved by the vendors agreeing to meetings with a handful of major clients,
but only when all of the contract details have been agreed and only within seven
days of legal completion. An alternative response may be to obtain an indem-
nity against identified contracts not being renewed and cash placed in an escrow
account. The wording will be a contentious issue, however, and could become
a deal breaker.
Relocation may be a plus or a minus
Existing floor space within the target company may be inadequate to handle
the projected growth. The vendors may agree to retain the freehold and to rent
the premises for an agreed period of time, which could provide sufficient time
to move to other premises with ample room for expansion.
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If the vendors wish to retain the freehold to benefit from development for alter-
native use, perhaps for residential housing or a supermarket site, this could be
a plus factor, provided you are satisfied that alternative premises can be found
locally and you obtain a rental agreement offering ample time to relocate. For
example, if the vendors are only prepared to offer 12 months continued usage,
it means that relocation must become an urgent priority immediately on legal
completion.
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Chapter 3Develop your strategy into anacquisition profile
Strategy needs focus
Evaluate alternatives to acquisition
Organic growth
Trading agreements
Strategic alliances
Minority equity stakes
A joint venture or consortium
A majority equity stake
Performance-related deals
Assess the likely number of acquisition targets
Write an acquisition profile to focus your acquisition search
Maximum cash available for acquisition
A Thorogood Special Briefing
Chapter 3Develop your strategy into anacquisition profile
An effective strategy needs to define market segments, commercial rationale
and priorities. It cannot be shrouded in vague aspirations if an acquisition search
is to be successful. Probably the worst case I ever came across was the finance
director of a private group who was seeking help to sell a subsidiary which was
deemed to be non-core. I discovered that it had been acquired only four years
ago and the group managing director ‘could not remember why it was
acquired’. The financial director had only joined 18 months ago, and so he
regarded himself as innocent. You might feel that I have described a unique situa-
tion, however, there are plenty of lesser cases of sloppy thinking giving rise to
expensive acquisition mistakes.
The vital ingredients for a successful acquisition campaign are:
• a clearly articulated strategy
• an evaluation of the alternatives to an acquisition
• recognition of the management strengths and resources available within
the group
• the purchasing power available and/or obtainable to fund the acquisition
• a written Acquisition Profile, agreed by the board, as the template to
measure the relevance of possible acquisition targets and to focus on
acquisition search
Strategy needs focus
The following questions should be answered rigorously to provide sufficient clarity
and focus for a strategy to be a powerful tool to develop the company or group,
either by organic growth, other alternatives or acquisitions:
• Which existing market segments should we concentrate our future effort
and investment on? Why? Has the choice been researched adequately?
• Which countries (or regions) should we concentrate on?
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• Which market segments and countries/regions do we plan to enter?
Have we considered alternatives adequately and rigorously evaluated
the new opportunities selected?
• How will our commercial rationale differentiate us from our competitors?
• Which market segments, countries and products should we phase out
or withdraw from?
• Which divisions and subsidiaries should we consider selling, or
encourage management buy-outs for?
• What finance, people and expertise can be made available to achieve
our goals? Are these adequate? If not, how can the shortfall be overcome
at an acceptable cost?
• What threats or opportunities may be posed by developments in
technology, social change, political factors, terrorism or international
pandemic? What contingency plans are needed?
• Are our organizational structure, management development
programmes and staff recruitment programmes designed to help
achieve our plans? If not, what changes should be made?
Evaluate alternatives to acquisition
There is abundant anecdotal evidence that directors and senior executives enjoy
the excitement of the ‘acquisition game’. But it is not a game, it is deadly serious
because outright acquisition is so often the highest risk option. It is totally inade-
quate to give merely passing thought to other alternatives: they must be assessed
in a thorough and positive way. The pros and cons of alternatives to acquisi-
tion are set out below.
Organic growth
Organic growth is boring and hard work, but it is a powerful and cost effective
way to grow a business. Furthermore, the medium-term success of any acqui-
sition will require a commitment to organic growth within the business. It would
be naive to think that a string of bolt-on acquisitions will eliminate the need for
organic growth, because they are more likely to create a rag bag of businesses.
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If a market segment is growing rapidly or the company has been slow to enter
it, I accept that belated organic growth may be too little too late.
Team head-hunting should be considered. There are countless cases in a wide
range of service businesses, where recruiting a nucleus of key people has accel-
erated growth. More importantly, entire teams have been recruited successfully.
The key requirement is to offer a medium-term opportunity to accumulate wealth
in addition to a competitive salary and bonus package. It is not necessary to
give an actual shareholding at the outset, options or even ‘phantom’ options
can be used. It is vital, however, to construct a scheme which does not incen-
tivize key people to leave by cashing in at a time of their choosing.
Even a highly respected investment bank fell into this trap. A team leader and
three key executives were recruited to enter a new market segment. Unfortu-
nately, after two years each person could realize their capital gain for cash
whenever they wished. Unexpectedly, the team leader came under pressure from
his wife for the family to return to their native Scotland. The capital gain avail-
able was such that he could retire from investment banking, buy a country house
and start up a new business. Worse was to follow, within six months the other
key members left because the departure of the team leader left a gaping hole
in the business unit.
Trading agreements
When pursuing diversification into either a new market segment or overseas,
a trading agreement can offer a tremendous learning opportunity and generate
worthwhile profits and cash flow for a modest investment. Alternatively a trading
agreement may be a valid strategic goal.
Supermarkets, and even soccer clubs, may decide to exploit their brand
strength by offering a mobile phone service to their customers or financial services
such as a credit card. Typically, the supermarket or soccer club will enter the
market by securing a trading agreement with a major mobile phone operator
or financial institution.
Serendipity is unlikely to provide you with trading agreements. A clearly artic-
ulated strategy is required and the initiative taken to find a suitable partner. If
agreements in a particular market segment are either infrequent or unknown,
do not be deterred. The approach needs to be exposing your company to the
risk of success, by knocking on doors and kissing lots of frogs to find your trading
partner.
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Strategic alliances
My definition of a strategic alliance is simply a business development project
carried out by two or more organizations, without necessarily creating a new
limited liability company or taking an equity stake.
For example, car manufacturers such as Ferrari will fund a dedicated Formula
1 team as a logical development of their business. For independent teams,
however, adequate funding to have a competitive team must rely on commer-
cial sponsors, and this has become more difficult as a result of European Union
legislation restricting sponsorship by cigarette manufacturers. Developing and
manufacturing a suitable engine is unaffordable and it may be necessary to form
a trading agreement for the supply of suitable engines.
Another form of strategic alliance could be to fund a dedicated research team
in a university which is recognized as a centre of excellence within the industry
sector, to develop a new process, technology or product. The ‘partnership’ may
include using the developments for academic purposes and publication in due
course, provided that the commercial interests of the funding partner are
adequately protected.
Some professional bodies have chosen to outsource the provision of dedicated
training courses and seminars to a specialist company, rather than create an
in-house capability. The important features include:
• a fixed term agreement with renewal options and a break clause
• the design of courses and seminars which meet the needs of members,
and are not merely standard courses which are ‘re-badged’
• either a profit sharing agreement or a management fee paid to the
provider
Successful strategic alliances have led, in some cases, to the formation of a jointly
owned company. There are many more cases, however, where one partner has
become dissatisfied and the alliance terminated because not enough attention
was given to discussing the management styles, the decision making process,
and the resources to be provided by each partner. Compatibility is the key to
success, but the rationale for the alliance may simply expire for one of the partners
and they will want an exit.
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Minority equity stakes
Some business executives naively think that acquiring a minority equity stake
reduces the risk involved. Clearly, should the business fail then the financial
damage will be less, but it does not justify any less commercial, environmental
and financial due diligence compared with outright acquisition.
Acquiring a minority equity stake is recommended only in specific circumstances.
The danger which must be avoided is being ‘locked’ into an unlisted company
without management control, or even significant influence. In such a case the
only available way to realize the investment may be to offer the minority equity
stake for purchase by the other shareholders. There can be no guarantee that
they will be prepared to buy the equity, and the price offered may be downright
unattractive or unacceptable.
A minority stake may be appropriate when purchasing in a country where one
has limited knowledge of the cultural, social and management customs. If a
minority stake is acquired the purchase should provide:
immediate board representation to enable the purchaser the opportunity to learn
more about the country and the business from within, and to influence future
development
an option to acquire either majority or outright control within a given period
and at a prescribed price or valuation formula
In some countries, legislation demands that foreign companies are restricted
to minority equity stakes in certain industries. Provided management control
can be achieved, this may be better than rejecting the opportunity altogether.
Another key factor in the decision may be the ability or otherwise to repatriate
funds.
One reason to acquire and retain only a minority stake may be to secure distri-
bution outlets. For example, in some countries an oil company may acquire a
minority equity stake in several commercial oil distributors to ensure distribu-
tion outlets for its own products.
Another possible reason for taking a minority stake is to seek some form of prefer-
ential treatment from a key supplier. This may be a sound reason, but the trap
of investing in a key supplier to avoid the company being wound up could prove
to be an expensive way of merely delaying the inevitable loss of a source of supply.
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Whenever a minority stake in a supplier is being considered, the commercial
rationale should be rigorously examined and alternative sources of supply evalu-
ated before deciding to invest.
A joint venture or consortium
Based on personal experience, some people dismiss any thought of a joint venture
as merely a recipe for backbiting between the partners. I readily admit that this
could and does happen on occasions, but it can be avoided. The oil industry
and the international civil engineering sector have had to make joint ventures
and consortiums work because:
• the financial risks involved in a speculative oil exploration project may
be unacceptably large even for a global company
• the construction of a major dam may require other partners to
contribute specialist expertise such as underwater engineering
The key tips for success:
• Select partners with compatible management and decision-making
styles, as well as a common language capability. UK companies may
find that Scandinavian or Japanese companies operate very differently.
• Agree at the outset the management team to run the venture based
on either individual ability and experience or the most suitable
partner, not necessarily the largest shareholder.
• Avoid any undue interference in managing the venture by non-executive
directors or group staff.
• Realize at the outset that within a few years the commercial objectives
of the partners do change. It may make sense for one partner to buy
out the others, to sell the business or pursue a stock market flotation.
To discuss this openly before creating a joint venture company is to
be realistic and not negative at all. It requires more that a clause in
the articles or management agreement such as any partner may offer
to buy out another by making a written offer and then 30 days are
allowed to make a counter offer, say, at least 5% higher. Discussion
of the issues involved are essential, and some contractual clause may
prove to be totally unworkable.
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A majority equity stake
I find it difficult to justify taking a majority equity stake rather than acquiring
100% at the outset for a domestic acquisition. Possible different expectations
may include:
• the individual vendors expect to receive a dividend to boost their
income, contrary to group policy
• additional funds may be needed for expansion, but individual vendors
will not expect to provide cash or to guarantee a loan
• the formula, conditions and timescale for the obligatory sale or purchase
of the minority stake
It would be entirely wrong to assume that a minority stake is the only way for
vendors to receive a deferred capital gain. A more relevant option is to negotiate
a performance-related purchase which is explained in the following section.
When acquiring overseas, however, persuading the vendors to retain an equity
stake or inviting a local partner to invest may make good sense.
A Footsie 100 group in the financial services sector decided to enter the Italian
retail investment product sector. Their concern was that market research showed
that Italians had a marked preference to invest their savings with a company
with an ‘Italian feel’ about it. The answer was to find a local financial services
company in an adjacent market segment and persuade them not only to co-invest
but to find an Italian chairperson and two non-executives who would command
the respect of Italian customers.
Performance-related deals
Most acquirers recognize that an attractive service contract is unlikely to maintain
the motivation and commitment of a vendor who has made a large capital gain
by selling shares.
A performance-related purchase, often referred to as an earn-out deal, assumes
that:
• 100% of the equity is acquired at the outset at a price which reflects
the performance and assets of the company to date
• the vendors have a contractual right to receive a deferred capital gain
provided that agreed profit before tax targets are achieved during the
remainder of the current financial year and usually either one or two
subsequent years
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Vendors are likely to require that:
• the company continues as a stand-alone business during the earn-out
period, rather than be merged with another business or operation
• one of them continues as managing director throughout the earn-out
period
• all continuing directors will have a fixed term service contract for the
earn-out period plus, say, a further three months during which time
the final accounts can be agreed as a basis for calculating any earn-
out payments
Purchasers dislike earn-out deals just as much as vendors do because of the added
complexities involved. Furthermore, many corporate financial advisers have insuf-
ficient knowledge and experience to negotiate an earn-out deal, but this will not
necessarily deter them from trying.
Chapter 6 contains detailed guidance as to how to formulate and negotiate an
earn-out deal. I started life as a corporate finance advisor with an unfair advan-
tage, acting as a principal I had negotiated six earn-out deals and was
accountable for them until the final amount of earn-out payment was calculated.
Assess the likely number of acquisition targets
This needs to be done as an integral part of deciding the most relevant option
to select. If the likely number of relevant acquisition targets is only one or two,
and this does happen, then other alternatives need to be evaluated as a fall-back.
At a public seminar I presented, one delegate asked, “How do I prioritize my
acquisition search because I have identified more than 600 relevant target compa-
nies?” I just managed not to laugh, but some delegates did.
When the number of targets is either very small or unworkably large, it is neces-
sary to review the search criteria. Ideally, there should be at least a handful of
targets but not more than, say, 50.
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Write an acquisition profile to focus your acquisition search
An Acquisition Profile needs to be written, and authorized, before any search is
initiated. It will minimize abortive effort and accelerate your acquisition programme.
I was asked to review an acquisition search by the chief executive of a substan-
tial listed group because “our dedicated team has failed to find a suitable
acquisition after two and half years so they are clearly getting it wrong.”
Their brief was to acquire a leisure company, listed group, subsidiary or privately
owned, to become the cornerstone for a new profit stream. The team was invited
to be imaginative in their search.
I found the search work to have been done extremely well, despite the
ludicrously vague remit. Recommended targets were submitted in writing to a
committee made up of the group directors. To ensure a consensus, a target had
to receive unanimous agreement by the group directors. I asked them to humour
me by reviewing six companies again with me which seemed relevant. Each one
had been rejected by personal subjectivity. A caravan park operator was rejected
because one director said “I would never holiday in a caravan park!”
The outcome was that one of the six companies was acquired and proved to be
a successful new profit stream.
An Acquisition Profile should not exceed two pages, and it should address:
• market segments, products, services
• commercial rationale
• maximum cash available for acquisition
• maximum total purchase consideration
• minimum size
• minimum profitability
• management and management style
• location
• key requirements for success
• financial return to be achieved
Each of these items is described below to provide a basis for writing an Acqui-
sition Profile.
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Market segments, products and services
Clarity is key. A vague description such as leisure or support services is a recipe
for abortive effort, because these are open to countless interpretations.
Conversely, a car park management company serving public sector clients such
as hospital trusts and leisure centres gives focus, and avoids the temptation to
acquire a company because it is up for sale.
Commercial rationale
This should spell out the key reasons for acquisition and, ideally, how the business
will be differentiated from competitors. For example, the financial squeeze on
hospital trusts and leisure centres means any extra sources of income are very
attractive. The market is growing rapidly and it could be offered to existing clients
for whom we provide other support services in the public sector. The business
model will be to charge a management fee and to have a profit sharing agree-
ment with each client.
Maximum cash available for acquisition
This should take into account any cash requirements of the existing business
and the likely needs of the acquisition over the next two years, which often tend
to be underestimated.
Maximum total purchase consideration
This should take into account any term loan, issue of loan stock or shares to
finance the purchase, and reflect the asset allocation by sector to be pursued
by the acquiring group.
Minimum size
The amount of management time to negotiate an acquisition and to integrate
it differs very little regardless of size. I strongly recommend one sizeable acqui-
sition, rather than a handful of smaller deals. Turnover and/or gross profit can
be used as an indication of size, as an alternative to profit before tax.
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Minimum profitability
Acquiring a loss making company will be less costly than a profitable one, at
least in the amount of purchase consideration. The harsh truth, however, is that
some bargain acquisitions bought for just £1 and an assumption of liabilities
have proved to be disastrously expensive.
Key issues before buying a loss making or underperforming business include:
If it is to continue as a stand alone business, rather than be folded into an existing
operation, an experienced chief executive and financial director need to be injected
immediately to work full-time.
The causes of underperformance must be established before completing a deal,
and never assume that the reasons outlined by the vendors are accurate.
The action required to eliminate losses must be articulated pre-deal. Statements
of motherhood such as overhead reduction and increased selling prices are
dangerous. If people are to be made redundant, a provisional list needs to be
identified, and the implications of the Transfer of Undertakings and Protection
of Employees legislation must be taken into account. Any assumption of increased
selling prices should be based upon commercial due diligence, and not simply
a hunch.
Management and management style
Continuity of management and a compatible style are important issues, unless
the business is to be folded into an existing operation. In some sizeable private
companies, even minor decisions are made by the directors and substantial
decisions are based on instinct alone. The key is to sell the need for different
management disciplines and to avoid the loss of entrepreneurial flair.
Where a performance related deal is negotiated, it must be realized that the share-
holder directors will almost certainly leave as soon as the deferred purchase
consideration has been achieved. More importantly, if the directors realize that
they will not earn any more because performance targets will not be achieved,
do not be surprised if they decide to leave prematurely. From the outset make
plans for when the directors leave by having executive directors ready to assume
management control.
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Key requirements for success
On countless occasions, an acquisitive client has presented me with an Acqui-
sition Profile with as many as 10 or 20 key requirements for success. In fact they
have defined the perfect company to acquire, which simply does not exist.
I believe there should be no more than two or three key requirements for success.
Furthermore, it may be that no company exists today in the market segment
with more than one or two key requirements for success. So be it, but the key
requirement for success is to be able to change and develop the company post-
acquisition into a successful business.
Financial return to be achieved
The financial return expected should be specified at the outset. Many groups
use a discounted rate of return calculated after corporation tax, typically calcu-
lated for a period of at least seven years. The question of valuation is addressed
in Chapter 5.
Discounted cash flow analysis is not a panacea which will ensure an ‘accurate’
valuation. In most sectors, forecasting more than two or three years ahead is
nothing more than guess work, because market and technological change are
likely to alter the playing field substantially. For example, it is not long ago that
the oil prices were forecast to reach $60 a barrel. Today prices are higher than
$70 a barrel. Furthermore any cost rationalization or unlocking of synergy is
likely to be realized within the first couple of years or so, or never achieved at
all!
So, unsophisticated though it is, I believe the benchmarks to measure acquisi-
tion success in financial terms is by what is achieved in the first two or three
years in terms of:
• sales
• % gross margin
• profit before tax
• cash generated or injected
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Blank
Chapter 4Find relevant targets and woo vendors
A UK in-house search – initial stages
Be wary of using external advisers
An in-house UK search – main search
Don’t just contact vendors, woo them from the outset
The initial meeting with the vendors
The key meeting to obtain streetwise
information from the vendors
An overseas search
A Thorogood Special Briefing
Chapter 4Find relevant targets and woo vendors
The vital ingredient for a successful acquisition programme is not the identifi-
cation of targets, but the ability to woo vendors. In my experience, both as an
executive and professional adviser, the most successful acquisitions have been
those where the company was not for sale until a persuasive approach was made.
Also, never forget that when a company is being marketed, the reasons for sale
outlined by the vendors may be plausible but are often not the key reasons and
are merely a smokescreen.
A UK in-house search – initial stages
For an acquisition search in an existing market segment it is possible that the
identity of every worthwhile target company is known. Even for an adjacent
market segment, however a systematic search may be essential.
Provided that one person is given accountability, with a deadline for comple-
tion, it is entirely possible to carry out an acquisition search in-house. Valuable
sources of information include:
• Market sector surveys which are published annually for a wide variety
of sectors, and cost typically between £250 and £500. Although compiled
from annual reports sent to Companies House, which means that the
figures are somewhat out of date, these are a highly cost effective means
of identifying the names of possibly relevant companies.
• Commission a sector survey to meet your needs. If no sector survey
is published, approach a debtor rating service and ask them to produce
a tailor-made list based on your criteria for:
– the standard industrial classification number for the segment you
wish to search
– a range of acceptable turnover
– minimum pre-tax profits.
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32 A THOROGOOD SPECIAL BRIEFING
The cost is likely to be similar to that of a published sector survey, or somewhat
higher depending upon the number of target companies.
Let there be no doubt, however, that the above approaches are simply quick, cheap
and ‘dirty’, in order to assess the likely number and names of target companies.
The next stage is to visit websites of the companies identified to assess whether
or not their business model fits your acquisition criteria, and only then to incur
the cost of obtaining a copy of the most recently filed and abbreviated Annual
Report for each company still included in the search.
One acquisition approach which is destined to fail, in my experience, is when
the chief executive announces to board members that it is their responsibility
to bring relevant target companies to the attention of the board. It will simply
be quickly ignored and forgotten.
I do not rule out, however, getting together a group of people with wide industry
experience from within the business to brainstorm possible targets.
The next step, however, should be to consider the use of external advisers before
proceeding with an in-house search.
Be wary of using external advisers
I do not reject using external advisers, but you need to be extremely wary of
the methods to be used and hard nosed about their rewards.
At the initial meeting with you, the external adviser should:
• Demonstrate their sector experience
• They may have virtually none, so they will be learning at your expense.
Ask them how many legally completed deals they have achieved in this,
or closely related sectors. What is their knowledge of recent deal activity
in the sector and prices paid? This is basic pre-meeting homework which
they should have done!
• Outline their search techniques
One corporate finance adviser told me they typically sent out up to
1,200 emails to prospective vendors (a really selective approach!) saying
they had been appointed by an un-named buyer.
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33A THOROGOOD SPECIAL BRIEFING
In addition, they emailed at least 75 intermediaries to ask if they were
acting for any relevant vendors. This can be effective because it will
identify companies already for sale. (No follow up was done whatso-
ever, and this was their search process.)
• Be ready to challenge your acquisition criteria.
If the external adviser is sufficiently knowledgeable or has done
adequate homework, they should be ready to challenge your acqui-
sition criteria to be:
– too broad to focus a search
– too narrow that barely any candidates exist
– in a sector which looks unattractive
– and be able to demonstrate their ability to open doors for you
The adviser should confirm they will telephone the decision-maker in target
companies to say that they are acting to acquire for an un-named (at this stage)
client and offer to meet prospective vendors to reveal the acquirers identity and
outline their rationale.
Establish the fees charged and exclusivity offered. You should reject a consul-
tancy approach.
Some search firms seek to simply provide you with a written report on each
relevant target company, and leave you to progress them, for a fixed fee reflecting
the time spent. The search adviser cannot lose and has no incentive whether
you acquire or not.
The search adviser should do comprehensive research and open doors for you,
as outlined above, for a fixed fee, which means they will make a loss unless you
legally complete a deal. I believe that £10,000, plus out of pocket expenses is a
reasonable reward for the work and 1% of the deal value, but only paid when
the purchase consideration is paid to the vendors by you, otherwise in an earn-
out you pay sizeable fees at legal completion for earn-out payments which are
never paid because of underperformance by the acquired company.
The question of exclusivity is one of vital protection for you. Some search advisers
may assume that target companies rejected by you or where your approach is
turned down by the vendors are fair game for them to be appointed to sell these
companies! Who knows whether you may want to acquire these companies in
a year from now or, indeed, whether or not the vendors will be ready to sell to
you by then. Do not deprive yourself of the opportunity.
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An in-house UK search – main search
Meetings with prospective search advisers will help you to decide whether or
not to do an in-house search and, more importantly, you should gain some useful
tips to help you to carry out an in-house search effectively.
The initial stages of an in-house search described earlier in this chapter, means
that you have:
• identified the names of (possibly) relevant target companies, with their
last reported turnover, profit before tax and net tangible assets
• visited the websites of these companies to check the relevance of their
products, services, business model and locations to rule out unsuitable
companies
• obtained the most recent abbreviated Annual Report available from
Companies House, rather than the full report, to avoid unnecessary
expense
It must be recognized, however, that Annual Reports may be misleading for the
purpose of an acquisition search, because it may be that:
• private companies deliberately understate profits to minimize their
corporation tax liability
• subsidiaries of groups may understate their profits as a result of transfer
pricing or management charges applied by group
• businesses, even large ones, of a group operate as a trading division
and may not be captured by electronic searching
• a management buy-out company which may have profits depressed
by the interest cost from a large debt used to finance the purchase,
and would disappear as a result of an acquisition
The reality is that the only way you will obtain reliable information is direct from
the vendors, and this is why it is vital to woo them.
Another avenue to pursue at this stage is to contact selected corporate finance
advisers and business brokers in order to find out if they have been appointed
to sell companies which are relevant for you.
Middle-market corporate finance advisers sell companies primarily in the £5M
to £100M deal value range. These firms include the middle tier of accountancy
firms, outside of the Big 4, and independent corporate finance boutiques.
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Business brokers handle deals mainly in the £2M to £10M deal value range, and
you should realize that they will expect you to pay them a finders fee for intro-
ducing a deal which you legally complete. They have standard fee scales, but
don’t just accept this and negotiate persistently.
Investment banks, even the smaller ones rarely get involved in deals less than
£100M in value and the larger ones could well focus only on £1 billion plus disposal
mandates.
Don’t just contact vendors, woo them from the outset
People are bombarded by so much email that a request to explore a mutual oppor-
tunity (unsaid, deliberately, for you to acquire them), may be ignored as another
junk email.
Curiously, today, the old fashioned letter has more impact because directors
receive relatively few of them. Many, many vendors, however, tell me they get
at least one every quarter and many are consigned to the waste paper basket.
Effective wooing of a prospective vendor needs to be done person-to-person.
Ideally you have met the person before and can arrange a lunch to explore
(unstated) mutual opportunities. Failing that, perhaps you know, or could find
someone, who could introduce you to the vendor and this will lead to a lunch.
Either way, towards the end of the lunch it would be reasonable to say “whenever
the time does come for you to think about a sale, we would be interested”. Then
listen to the response. If it is to rule out a sale for several years, make sure you
maintain contact, say, about quarterly because circumstances may and do change
unexpectedly.
If you do not know the vendor, or are unable to obtain an introduction via someone
else, a telephone call to arrange a lunch to explore ‘mutual opportunities’ needs
to be made.
External advisers, particularly corporate finance people, have in-built advan-
tages. Firstly, they have plenty of experience of making these calls. Secondly,
they are able to say that they are carrying out a tailor-made search exclusively
for a client and research has identified the vendors as a relevant target. Usually,
the acquirer will not want to reveal their identity at this stage, and the adviser
will offer to visit the prospective vendors, name the prospective acquirer, explain
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the commercial rationale and describe the deal history of the vendors. The advisers
must sell the acquirer as an attractive partner offering a compatible deal from
the outset.
Remember there are no silver medals for acquirers!
Either the adviser persuades the vendor to meet the acquirer, and ideally the
adviser will be present to introduce people and to make sure the first meeting
is effective, or, there simply will be no deal in the foreseeable future.
The initial meeting with the vendors
This assumes that the vendors have indicated a willingness to at least have one
exploratory meeting.
In advance, the acquirer should offer a confidentiality agreement to protect the
vendor or be prepared to sign one provided by the vendor, which can prove
tricky. Some multinational corporations insist that their legal department approves
and negotiates or insists on required changes! This is potentially a huge turn-
off to a prospective vendor and must not be allowed to happen. At this stage a
confidentiality agreement should be designed to be a comfort factor for the vendor.
If a deal progresses, a more suitable and wider ranging confidentiality agree-
ment can be signed.
The venue of the first meeting is important. Vendors should reject a meeting
on their premises, because it is possible that a member of staff may recognize
the acquirer from photos in the trade press, or having worked for the acquirer
previously, and speculation will be rife.
It should be a neutral venue, either at your advisers offices or in an hotel meeting
room convenient for the vendors.
Numbers attending should be small to underline confidentiality. It is vital that
the acquirer is represented by a key decision-maker, otherwise this will unsettle
the vendor, and ideally only one other person.
The purpose of this meeting is to woo the vendors and to convince them to agree
to a meeting to share more detailed information with each other.
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At this stage, the acquirer must demonstrably give more information than the
vendor, subject to stock exchange limitations. A written agenda would be too
formal, but the following should be covered:
• Understand the vendors personal aspirations, timescale for leaving
the business and particular concerns about selling.
• Outline the business rationale, future development plans and
management style of the acquirer.
• Name any acquisitions made in recent years and how these have turned
out. Ideally, the acquirer would extend an invitation, to be taken up
as and when appropriate, to meet recently acquired companies.
• Give comfort, but only if appropriate, that the current thinking is to
retain the present business locations, senior management team and
the staff, whilst adding tactfully that the acquirer knows relatively little
about the inner workings of the target company.
• Discuss current year performance to date in outline and the forecast
result for the current year. The acquirer may be happy to offer a printout
of the management accounts summary pages, but it should be
assumed the prospective vendor will only wish to talk about current
performance at this stage.
• Ask the vendor, if the meeting is going well, if they are happy to arrange
a further meeting to exchange more information which will allow you
to outline an offer and a timescale. If the vendors agree, they should
be given time to appoint advisers and have them present. If the vendors
are not ready to agree, however, you need to establish their specific
concerns and gently reassure them during the meeting. Failure to get
agreement to another meeting cannot be allowed to put a deal in
abeyance. If the vendor has legitimate concerns, such as consulting
other shareholders or family members, then this must be allowed to
happen but follow up is essential.
Successful acquirers must not be deterred!
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The key meeting to obtain streetwiseinformation from the vendors
The decision-maker of the acquirer should have an informal meeting with the
vendor first, in order to outline the information to be collated, to give the vendors
time to prepare and, if necessary, cajole and negotiate to obtain sufficient infor-
mation to provide an adequate basis for valuation in order to make an
indicative offer to the vendors.
Failure to have this preliminary meeting may well reduce the key information
gathering meeting to a shambles. The acquirer should provide an in-house team
for the information gathering meeting. The time and place for due diligence by
external advisers is only when, and if, Heads of Agreement have been signed.
The objective is not simply to ‘audit’ or verify past performance, or even the
current year to date. The aim must be to assess both the short and medium-
term future prospects as well. The art is that of prospecting for and assessing
the quality of the gold ore still in the ground, not just counting gold bars in the
vaults.
The essence of a successful initial investigation of an acquisition target is to identify
the vital factors for success in the business concerned and to examine these in
some depth.
On the negative side, one should be looking out for vulnerable features of the
business and assessing whether or not the performance has reached a plateau
or is about to decline. On the positive side, equal importance should be given
to identifying latent opportunities for profitable development and any under-
valued assets.
Another important factor to assess during the investigation is whether or not
the management styles of the companies are compatible. For example, a require-
ment to operate complex and rigorous financial planning control procedures
may be unrealistic to people used to working in an informal way with only
rudimentary budgetary control.
Information obtained should not be restricted to financial data. The scope of
the investigation must be wide enough to give an overall picture of the
business, covering marketing, sales, research and development, operations,
administration, human resources and staff relations.
The investigation should produce information sufficient to enable future profit
and cash flow projections to become a basis for deciding the value of the company
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to the purchaser. Also, an assessment of the present balance sheet worth of the
company needs to be made.
The initial investigation should only be regarded as complete when one can
comfortably make a firm recommendation either not to proceed further or to
value the business and to formulate an offer.
Formal profit and cash flow projections for more than the current year are
uncommon in private companies. It may be appropriate to ask the directors to
construct a profit forecast for the next financial year and to give broad sales
projections for the following two or three years. The information and assump-
tions used as the basis for these forecasts must be known. Then the team should
prepare their own profit and cash flow forecasts off-site, reflecting their own
assumptions and the impact of any changes to be introduced under new owner-
ship.
Some acquirers mistakenly challenge sales and profit projections made by the
vendors, robustly to say the least, and seek to persuade them to be reduced.
This will only create ill-will, the vendors are unlikely to collapse on the key issue
for valuing the business. It is much more appropriate for the investigating team
to say they feel the projections are somewhat over-optimistic, outlining their
reasons, and that they will produce their own forward projections on which a
valuation and indicative offer will be based.
An overseas search
Firstly, take a vital reality check! Overseas acquisitions are the riskiest of all, so
be sure you are equipped to manage an overseas acquisition before you
commence a search.
The risk increases as you move down the following list:
• a bolt-on in the same market segment for an existing subsidiary in the
country
• an acquisition in the same market segment where you have your own
sales office, not merely a sales agent
• an acquisition which is diversification from you existing subsidiary in
the country
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AND, THE MAXIMUM RISK OF ALL:
• any acquisition in a country where you do not have an existing business.
It is akin to knowingly trying to walk on water!
I do not believe that it is possible to carry out an effective overseas acquisition
search on a cross-border basis, in-house. It requires, preferably a suitable execu-
tive already working in the country, or someone to be transferred for at least
six months – but this is definitely second best.
Most companies, with good reason, use corporate finance advisers or a specialist
search company within the country. Talk to UK firms, which tend to be part of
global networks, or use the internet to identify prospective external help.
It is necessary to visit prospective search firms to assess their suitability before
appointing one. Your approach to these meetings should be similar to that
described earlier in this chapter for selecting UK search advisers.
Some overseas search advisers take a really opportunistic approach, namely that
as soon as you reject a target company they can either offer it to other clients
or pursue the company to be appointed to sell it.
Another trap to beware of is the ‘quarterly retainer’, rather than an acquisition
search. You are charged a set quarterly fee in exchange for the search firm
bringing to your attention any opportunities they learn about from their contacts;
and charge you a scale fee on completion which is unlikely to happen. I recom-
mend you run the other way.
I am categorically not against overseas acquisitions, but my successful experi-
ence as a principal and an adviser was based upon the watchwords of realism,
caution and rigour.
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Blank
Chapter 5Use commercial common sense tovalue a business and make an offer
Adjusted profit history and forecasts are vital
Quantify major cost rationalization opportunities
Calculate the adjusted net assets
Use your own adjusted profits for valuation
Structure the offer to reflect vulnerabilities
Discuss your offer face-to-face with the vendors
A Thorogood Special Briefing
Chapter 5Use commercial common sense tovalue a business and make an offer
Arguably, the financial analysis techniques relevant for valuing a business are
the same for buyers and sellers. This does not mean, however, that there is one
value for a business as a going concern. Buyers and sellers should have different
valuations because their assumptions should be different.
Before translating a valuation into an offer, the acquirer should take into account:
• How long have the vendors been trying to sell or actively market the
business?
• Has a previous deal fallen over? This may well have been (unsaid by
the vendors) because of unsatisfactory due diligence.
• Are there pressing personal issues prompting a sale such as terminal
illness or recent divorce?
• Are the vendors clearly wanting to retire as soon as possible
• Which other companies are likely to bid, and do they have a reason
to bid high? This does not necessarily mean you should follow suit.
• Is there a foreseeable breaching of overdraft limits, requiring personal
guarantees, or bank covenants or, worse still, administration?
• Is the business demonstrably in decline, and the vendors are unable
to turn it round?
Adjusted profit history and forecasts are vital
The cornerstone of a valuation by an acquirer should be based on the profit history
and forecasts, reflecting the way the acquirer will manage the business.
You may feel that profit history is like attempting to drive a car by using the
rear view mirror. Not so. Your discussions with the vendors may reveal that the
sales and profits of the previous two years were boosted by a one-off event. For
example, a change in tax rules affecting pension investments. Your aim should
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be to create a realistic picture for the three previous years, the current year, and
the next two.
Vendors and their advisers know only too well that adjusted profits provide them
with an opportunity to ‘increase’ the valuation base. Consequently, it is
commonplace for the acquirer to be presented with a written adjusted profit
and loss history and forecasts at the outset.
From the vendor’s standpoint it is worth adjusting profits for the previous three
years if this will help to establish a record of rising profits. One-off events which
may have significantly reduced profits in a year include:
• lump sum pension contributions from directors
• the start-up costs associated with entering an overseas market
• the closure of premises or the termination of a product
• the costs arising from major litigation
• significant redundancy costs
• the costs of relocating a factory, warehouse or office
• a large bad debt as a result of a major customer going into liquidation
• a strike affecting deliveries from a key supplier
• excessive personal expenses which will cease immediately post sale
It is quite possible that a prospective purchaser will reject some adjustments to
profit, but at least the vendor has set out an arguably valid profit history.
The acquirer should be ready, in a non-confrontational way, to question the
relevance and the amounts put forward. Some items may be a definite try-on.
Additionally there may be other factors which will enhance profits for the new
owners, such as:
• the directors being required to accept a reasonable executive salary
after the sale, compared with the substantial rewards enjoyed as owners
and directors
• the intention that a director will retire upon the sale of the business
and will not need to be replaced, or only by a lower cost executive
• the savings arising from the termination of relatives working for the
business at inflated salaries
• the benefits to be gained from recently taken action such as a price
increase, the elimination of a loss making activity and so on
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In the case of the disposal of a division or subsidiary, the vendors will adjust
the profits by ‘adding back’ charges allocated by the present group which will
cease following a disposal. These include a wide range of possible allocated costs
such as:
• a group management charge based on a proportion of central staff
costs
• a percentage levy based on sales value for group expenditure, such
as research and development or public relations
• service charges for the use of central departments such as information
technology, payroll, pension administration and so on
Typical additional costs which the acquirer must take into account include:
• the appointment of a qualified financial controller to replace an
unqualified book-keeper
• the need for increased insurance cover
• increasing some salaries to avoid unacceptable differentials compared
with similar staff already employed within the group
• additional pension contributions arising from employees joining the
group pension scheme
As a result of the above, the acquirer should produce his own adjusted profit
history, current year forecast and future projections.
Sometimes the acquirer sets out to justify a higher valuation by including profit
opportunities which they may be able to unlock but the vendor cannot.
Beware! This means you risk paying for the benefits you hope to unlock. These
should be calculated separately, and as a last resort some of this value may be
used to make an increased offer.
Profit opportunities which may arise include:
• purchase cost savings as a result of increased purchasing power
• cross selling the products and services of the acquired company to
existing group customers, and vice versa, both at home and overseas
• the rationalization of premises and overhead costs
As outlined earlier, and well worth repeating, the reality is that unlocking synergy
often proves harder than sighting the Loch Ness monster on a particularly dark
and foggy night!
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It is simply not enough to use a percentage saving on purchasing across the
board or to include a lump sum for premises and overhead cost savings. Rigour
is essential. For example, people savings must be based on identified jobs which
can be eliminated. Also, the one-off cost of termination must be taken into account.
Quantify major cost rationalization opportunities
Some acquisitions produce substantial cost rationalization opportunities for
the purchaser. Consider a private contract caterer which operates in a local
geographic area and enjoys a high market share. A nationwide acquirer would
be able to virtually eliminate the directors, head office staff and costs by folding
the business under the existing regional management structure. Conse-
quently, the rule of thumb in the market sector is to value businesses on a multiple
of gross profit. In these circumstances, it is unlikely that an overseas acquirer
wishing to enter the market could match the price because there would not be
similar overhead savings.
When a multiple of gross profit is used to value a business, however, any incre-
mental overhead costs required by the acquirer should be taken into account.
For example, retaining two sales executives or needing to recruit another assis-
tant accountant.
Also, there will be significant one-off costs including:
• termination payments to staff
• new livery on vehicles
• new stationery
• outstanding liabilities on a property leasehold
• the realizable value, costs and timescale for selling freehold premises
• equipment hire liabilities
Strategic rarity or significance value must be taken into account
Rarity value is real, strategic significance may be subjective.
A scarcity of acquisition targets becomes rarity when there is only one attrac-
tive company available to acquire in a country in a particular market segment.
Recently, US medical and orthopaedic product companies have been keen to
acquire in the UK and Ireland, but the lack of private companies which are suitable
5 USE COMMERCIAL COMMON SENSE TO VALUE A BUSINESS AND MAKE AN OFFER
47A THOROGOOD SPECIAL BRIEFING
acquisition targets means that scarcity is rapidly becoming rarity value. In such
a situation, competitive bidding may deliver an outstanding deal for vendors.
Strategic significance is sometimes used to justify paying an excessive price for
an acquisition, despite the fact that the acquirer cannot outline the eventual impact
on sales, profit and cash flow generation to justify the offer.
I believe there needs to be both strategic significance and an adequate finan-
cial return. For example, if a prospective acquirer has failed to penetrate a major
supermarket chain by organic growth, then an acquisition makes sense but should
be valued on the financial fundamentals of the acquisition.
Sometimes, stock market listed companies feel themselves to be under pressure
to make an acquisition, either to diversify into more attractive market sectors
or to reduce their own vulnerability to acquisition. If they believe this to be the
case, whether it is a correct analysis or not, it is likely to encourage them to pay
a somewhat more generous price as a result.
Calculate the adjusted net assets
Profit and cash flow generation should be the basis of valuation for the acquirer.
If the balance sheet is excessive by comparison, the vendors should be encour-
aged to retain the freehold and to offer the acquirer, say, a three year lease with
an option to extend at an agreed cost which should be reflected in future profit
projections.
It is useful, however, for the acquirer to calculate an adjusted net tangible asset
value expected at legal completion. This should reflect the treatment of freeholds
and any debt to remain on the balance sheet at legal completion.
Many service companies have net tangible assets of less than 20% of the total
purchase consideration an acquirer is willing to pay, and in some cases it will
be below 5%. This should be sobering to prospective acquirers, and cause them
to insist on an earn-out deal where some of the purchase consideration is not
only deferred but is dependent on delivering increased profits during, say, the
next two financial years.
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Use your own adjusted profits for valuation
You may be thinking, surely future incremental cash flow generation evaluated
on a discounted cash flow basis is widely accepted as a powerful technique
for capital expenditure projects, including acquisition. The purist in me agrees
with you, but the brutal reality is that forecasting sales, profits and cash flow
generation beyond two years post-acquisition is pure guesswork in most market
segments.
Arguably, discounted cash flow analysis should be carried out over at least a
seven year period and an assessment needs to be made of the realizable terminal
value of the acquisition.
The private equity players, previously often known as venture capitalists, have
a streetwise approach to valuation and there are features which corporate
acquirers need to know about.
Private equity houses usually make an offer based on a debt free and cash free
basis at legal completion, which simplifies matters.
Their valuation is based on EBITDA, defined as:
• Earnings – i.e. profit
• Before
• Interest – because this ‘disappears’ on a debt free and cash free basis
• Taxation
• Depreciation
• and Amortization
They assume that EBITDA is a sufficiently close approximation to net cash flow
generated. Their valuation will be based on an exit, assumed to be on a cash
basis payable at legal completion, within a maximum of five years. Their aim is
to seek a pre-tax internal rate of return of 30% to 35% compound per annum,
taking into account any dividend payments as well as the sale proceeds.
As they would prefer to exit within 3 years, because this is likely to yield the
maximum compound annual rate of return, they will check this out as well.
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Even today, however, a surprising proportion of listed companies use a simple
price earnings approach to valuing a target company. This involves:
• using the adjusted pre-tax profits of the vendor for the previous financial
year
• deducting a full rate of corporation tax, even if the target company pays
a lower rate, to calculate the earnings, which is the profit after tax
• selecting a relevant price earnings ratio by examining the P.E. ratio
of comparable companies listed in the major newspapers
• deducting about 33% from the multiple you select to reflect the fact that
unquoted companies exits are typically discounted by this amount.
For example:
£’000
Adjusted profit before tax of target company
for previous financial year £1,200
Assume 30% corporation tax to be deducted £(360)
Earnings, i.e. profit after tax £840
Average price earnings ratios of relevant listed companies 15.0
Deduct 33% to reflect unquoted exit values (5.0)
Valuation multiple to be used 10.00
Valuation derived is £840,000 x 10 = £8.4 million
Corporate acquirers should never rely on a single valuation technique, so there
is merit in using a DCF approach based on EBITDA and the internal rate of return
required by the group to arrive at alternative valuations.
Other issues to be taken into account are:
• Using on-line services, obtain details of deals done in the UK during
the previous two years in the market segment. Recognize that the on-
line service is unlikely to have access to adjusted profits for the vendor
and this could inflate the valuation multiples given.
• Although Price Earnings ratios for listed companies are calculated
arithmetically on the previous year profit after tax, the share price is
likely to reflect future profit performance. So it is useful to do another
valuation of the target company based on current year adjusted profits.
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• Which other corporate acquirers are you likely to be bidding against
and private equity houses. Use this information to assess other likely
bids, but not to justify your bidding higher in order ‘to win’.
Structure the offer to reflect vulnerabilities
When you have arrived at your maximum deal value based on the above assess-
ment, you need to decide the deal structure and your opening offer.
If there are demonstrable vulnerabilities within the business, you should insist
upon an earn-out deal at the outset. Without agreeing the deal structure in outline
with the vendors, any seeming progress is likely to come unstuck.
Vulnerabilities which may require protecting against include:
• the renewal of major medium-term supply contracts which must be
renegotiated within the next two years
• the risk that a group of key fee earners will leave to do their own start-
up or be offered a better deal by a competitor
• major technological developments or legislative charges which are likely
to or could happen
• sales could be seriously affected by an oil crisis arising from armed
conflict
In these circumstances, the initial offer payable at legal completion should fairly,
but not over-generously, reflect the current value of the business. Some
acquirers lose the deal at this stage, irretrievably, by making too low an offer
which the vendors dismiss out of hand.
It is unlikely that the vendors will agree to an earn-out of more than two finan-
cial years, and the reality is that a longer period may become problematic for
the acquirer because it could hamper necessary strategic change within the
business.
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Discuss your offer face-to-face with the vendors
Do not be tempted to make a written offer to the vendors without a prelimi-
nary meeting to agree deal structure, including any requirement on your part
for an earn-out deal, an indicative payment at legal completion and the overall
deal value they could achieve from an earn-out.
Vendors quite rightly often reject purchase consideration payable in ordinary
shares of a listed acquirer, so you will need to approach this cautiously and flexibly,
or better still, not at all.
Before you send an offer letter, you need to be confident that the deal structure
has been agreed in principle, you are aware of any deal breaker notified by the
vendors, and that your letter will not contain any nasty surprises which you should
have discussed with the vendors.
Within 48 hours of the vendors receiving your offer letter, telephone them to
find out if anything needs clarification. If you simply sit back and wait for them
to respond they may have agreed a deal with someone else by the time you contact
them.
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Chapter 6Negotiate the deal and sign Heads of Agreement
Negotiate the Heads of Agreement
Earn-out deals need defining
Warranties and indemnities need to be negotiated
Fix the maximum liability of the vendors
Joint and several liability for vendors
Agree the basis to trigger a warranty claim against the vendors
A Thorogood Special Briefing
Chapter 6Negotiate the deal and sign Heads of Agreement
It is virtually certain that you will need another face-to-face meeting with the
vendors following your written offer letter, as they will be keen to negotiate an
improvement and obtain clarification.
The purpose of this meeting should be to negotiate:
• any amendments to the original offer and clarification of specific points
in the letter
• any changes to the form of purchase consideration requested by the
vendors
• the management continuity you require, or the departure of any
shareholders you want to happen, without any termination payments
• how any potential deal breaker issues will be resolved
• a date for the meeting to draft the Heads of Agreement for signing
and the granting of exclusivity immediately afterwards, which should
allow about eight weeks for due diligence and the legal work prior to
completion.
Negotiate the Heads of Agreement
The effective negotiation of Heads of Agreement needs a structured and rigorous
approach. Firstly, it is essential to understand what the Heads of Agreement
are, and what they are not. The Heads of Agreement should be a more detailed
description of the deal and written in commercial language. It is typically about
three to six pages long, and serves as a briefing document for each side to instruct
their lawyers.
The Heads of Agreement are categorically not an obligation on either side to
legally complete the deal. Importantly, if due diligence reveals unexpected
problems, or their magnitude, the acquirer has every right to renegotiate the
deal or to withdraw.
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Very few clauses should be binding. The most common one is that neither side
may announce the deal without the express permission of the other. Some vendors
may seek protection that the value of the deal will not be disclosed to the press,
because they do not wish family, friends and neighbours to know how rich they
have become. Yes, this does get raised.
Acquirers should reject any request for a cost indemnity for the vendors if the
acquirer withdraws. I have always advised vendors that it is an unrealistic request,
because the acquirer will insist on a reciprocal indemnity and attach onerous
conditions to any vendor indemnity so that it is virtually unenforceable.
It is essential that the Heads of Agreement are framed in a tax efficient way and
in accordance with company and employment law, such as TUPE (Transfer of
Undertakings, Protection of Employees) legislation. A corporate finance adviser,
or a suitably experienced in-house deal-maker should be able to ensure this.
I strongly recommend that you agree with the vendors that neither side will bring
a solicitor to the Heads of Agreement meeting. It is easy for the goodwill between
both sides to be undermined by lawyers prematurely getting involved in techni-
calities which should be addressed later. Do tell vendors that, if they wish, their
solicitors can be asked to give the thumbs up before the Heads of Agreement
are signed.
Send either draft Heads of Agreement or a suggested agenda.
Some acquirers, encouraged by their corporate finance advisers, send a draft
Heads of Agreement prior to the meeting to negotiate and agree them. This could
prove to be one step forward and two steps back because the vendors inter-
pret this approach as unduly presumptuous.
My preference is to send a draft agenda ahead of the meeting and to invite the
vendors to add any items they wish to be added. This means the meeting should
start smoothly because the agenda has already been agreed, and the acquirer
should remind the vendors that the mutual expectation is to sign Heads of Agree-
ment within two working days and exclusivity be granted.
In addition, to confirm the offer, the agenda needs to include:
• Earn-out arrangements
• Warranties and indemnities
• Assets to be excluded. It may be agreed that certain freehold premises
are to be excluded and a medium-term lease will need to be negotiated
in terms of the duration, initial rental and rent review dates. In the case
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of a private company, assets for personal use such as cars or a boat
may be excluded and a price will need to be agreed for the individuals
to purchase them. The written down book price is often agreed as the
value and this may well be lower than the market value.
• Form of purchase consideration. If shares of the acquirer form part
of the purchase consideration, the value of the shares will need to be
defined. To guard against a sudden increase in the share price
working against the vendors, it may be necessary to accept that the
value of the shares is the lower of the mid-price at the close of the day
immediately prior to legal completion and the average share price for
the previous 20 working days. When the acquirer requires some of
the consideration to be in the form of loan notes, then the interest rate
and payment dates, the redemption arrangements and bank guarantee
will need to be negotiated.
• Warranted net assets at completion. It is commonplace for the
acquirer to seek a minimum net asset value at legal completion, with
a cash adjustment to make up any shortfall. An issue which may affect
the net asset figure to be warranted is the amount of working capital
to meet the short-term needs of the business and this will need to be
negotiated.
• Completion accounts. The vendor may be asked to produce a balance
sheet at the completion date to verify that the net assets acquired by
the purchaser are in accordance with Heads of Agreement.
• Release of personal guarantees. The shareholders of a private
company may have given personal guarantees under a leasehold
agreement or for a bank loan. If so, the vendors need to realize that
the acquirer cannot undertake to release them from their guarantees
at completion. Release rests with the holder of the guarantee and the
acquirer should promise to use its best endeavours, a phrase which
has legal meaning, to procure a release. Normally, there should not
be any problems because the financial resources of the acquirer should
be more acceptable, and any loans may be repaid at completion or
shortly afterwards.
• Job titles and service contracts. Continuing directors will usually be
required to sign new service agreements with salary, bonuses,
pension contributions and fringe benefits in line with the acquirer’s
normal policy; job titles may be changed as well. If there is no earn-
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out deal, then the notice period will be the normal one used by the
acquirer, but when there is an earn-out the continuing directors need
to ensure that their service contracts extend for the duration of the
earn-out agreement, plus an additional three or four months to allow
for the final accounts to be prepared, before the standard notice period
comes into effect.
• Any consultancy agreements. These are sometimes encountered
following the sale of a private company. The acquirer may want to have
access to a ‘retiring’ director to make use of personal contacts or
technical know-how for a limited period. If so, the reward must be
commensurate with the amount of time spent.
• Restrictive covenants. It is becoming increasingly difficult to enforce
restrictive covenants in employee service contracts, but vendors should
assume that restrictive covenants in the Share Purchase and Sale
Agreement will be enforced. The covenants are likely to cover any
competing business serving the same geographical area typically for
a three-year period, although it may be necessary to negotiate this down
to two years.
• Pensions. It is essential that the acquirer is aware of any shortfall in
the pension fund compared to the liabilities and has reflected this in
the offer. Equally, the proposed pension arrangements post legal
completion should be outlined and be compliant with existing
regulations. Also, the acquirer must assess whether or not the
reaction of staff will be hostile.
• Due diligence. The acquirer needs to outline the scope, extent and terms
of reference for due diligence. It may require persuasion and
negotiation for the vendors to agree, but it needs doing now and cannot
be left until due diligence commences and disagreement arises.
• Timetable to legal completion. It is quite inadequate to agree that
“because Christmas is nine weeks away, let’s agree we will target legal
completion for the week before Christmas”. This is nothing less than
shooting in the dark; the acquirer needs a detailed timetable in order
to know promptly when the vendors are allowing the timetable to slip.
The typical steps in a time table are:
Heads of Agreement signed Week 1
Draft Share Purchase and Sale Agreement received Week 2
Due diligence commences Week 2
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Due diligence investigation completed Week 5
Date reserved to meet to finalize the Share Purchase
and Sale Agreement Week 6
Formal executive or investment committee approval Week 7
Disclosure statement submitted to the vendors Week 8
Legal completion Week 8
The number of weeks required will vary according to the size and complexity
of the deal. In a straightforward case, due diligence may require only two weeks,
but in a complex acquisition it could take five or six weeks, especially if the initial
work prompts the need for supplementary investigation.
When a circular to shareholders is needed by a stock market listed company,
either to obtain the requisite approval or to have a rights issue of shares, additional
steps and time will need to be included in the timetable.
Earn-out deals need defining
Earn-out deals occur in about one third of all private company sales to a corpo-
rate buyer in the UK, but rarely feature in the sale of a subsidiary. Vendors of
private companies are understandably nervous about earn-out deals because
part of the purchase consideration is not only deferred but contingent upon
achieving agreed profit targets for usually the first two years post-acquisition.
In addition to the inevitable trading uncertainties, there is always the concern
that the acquirer may hamper profit achievement.
Acquirers should insist upon or seek an earn-out deal if:
• the company is particularly dependent upon issues such as successfully
negotiating a major five-year contract renewal in, say, a year’s time
with a major customer, or a critically important sole supplier
• profits are forecast to grow dramatically
• the continued commitment of directors is demonstrably important; or
• the net tangible asset backing is extremely low compared with the
purchase price
Once legal completion occurs the company will be expected to adopt the acquirer’s
accounting policies. There have been a few exceptions, however, because of partic-
ular circumstances whereby the company has been allowed to continue with
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existing accounting policies purely for earn-out calculation purposes and the
figures have been converted afterwards.
To avoid argument and even litigation in due course, it is essential that profit is
defined precisely for earn-out purposes. Typically the definition should be based
upon:
• the acquirer’s accounting policies
• profit before tax arising from the ordinary course of business – which
would rule out a capital gain on disposal of a freehold property and
similar exceptional items
• an agreed and specified annual charge for services the acquirer will
provide such as audit, tax advice, legal, payroll and pension
administration, etc
• a specific ‘rate card’ for group services which the company intends
to use when required – examples could include rent of additional space,
transport, etc
• an interest rate, possibly linked to underlying base rates, for cash
borrowed from the group to finance expansion
• a notional interest credit for any interest earned as a result of the group
placing surplus cash on overnight or short-term deposit
• agreed rules for profit sharing when carrying out business with other
group subsidiaries
The profit thresholds set for earn-out payments to be made must be negotiated
using the above definition of profit. There may be other circumstances, however,
which should be taken into account when agreeing the profit thresholds, for
example if:
• the acquirer insists upon appointing, say, a qualified accountant as
finance director in addition to the existing accounting staff, then the
total cost of employment should be deducted from the threshold
• the acquirer wishes the company to launch sales offices in Europe and
the likelihood is that this will detract from the ability to maximize earn-
out payments, then it should be negotiated that all income and expenses
arising are excluded for earn-out purposes
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Warranties and indemnities need to be negotiated
Cost indemnities are a binding obligation on the vendors to reimburse the acquirer
for liabilities which relate to the period up to legal completion date. The most
onerous indemnities relate to taxation matters and the buyers lawyers will usually
seek protection for seven years – because the Inland Revenue has a period of
six years to claim additional tax payments. The vendors cannot get out of a tax
obligation by claiming that both they and their auditors were completely unaware
of the situation. Ignorance is categorically not a defence.
A warranty puts the burden of proof on the acquirer to demonstrate that they
would have reduced the purchase price, and most importantly to quantify the
amount, had they known that the company was in breach of a warranty at legal
completion. The buyer may ask for a three-year warranty period, but it may be
necessary to accept a two year period.
Fix the maximum liability of the vendors
Acquirers, egged on by their solicitors, often take a hard line and state that the
maximum liability under indemnities and warranties should be the total
purchase consideration, regardless of whether it is paid in cash, loan notes or
shares.
I believe this is unrealistic. The vendors risk repaying the entire purchase consid-
eration even though they have a capital gains tax liability as well. Further, you
may be under pressure to reduce the maximum liability further by deducting
the market value of any freehold property owned by the company and which
is demonstrably saleable.
Joint and several liability for vendors
It is entirely reasonable for the acquirer to demand joint and several liability
among the individual shareholders of a private company, which means that if
any shareholder does not pay his/her share of the liability then the acquirer can
pursue the other shareholders. The liability of each shareholder can be capped
by all of the shareholders entering into a deed of undertaking to pay the requi-
site share of liability claims.
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Agree the basis to trigger a warranty claim against the vendors
This subject often generates a lot of emotion and yet it can be dealt with easily
and quickly.
Acquirers are well aware of the management time and professional fees involved
in pursuing a warranty claim if litigation is required. Consequently, they should
readily agree that the minimum aggregate claim, to be pursued is £50,000.
Many acquirers will probably accept that only individual warranty claims of at
least £5,000 will qualify toward the minimum aggregate sum of £50,000 or any
higher figure which is agreed.
In stark contrast, however, cost indemnities give the acquirer the legal right for
full compensation.
Any purchase consideration to be held in escrow
Some acquirers will seek to have a sum of money deposited in an escrow account,
held by the two firms of lawyers, to ensure that cash is available to meet warranty
and indemnity claims. Although the vendor will be credited with the interest
received, they will be deprived of the use of the money held in escrow.
If an acquirer is insistent on holding money in an escrow account, the time to
raise and negotiate it is during the Heads of Agreement meeting. Some acquirers
deliberately stay silent on this point and simply include the requirement for an
escrow account in the first draft of the Share Purchase and Sale Agreement.
This is likely to prompt a hostile reaction from the vendors. Their response will
be to reject it because the issue should have been raised at the Heads of Agree-
ment meeting. In one case, the vendors terminated the sale to a listed group
because they regarded the unexpected requirement for a 25% retention
included in the Share Purchase and Sale Agreement to be a fundamental act of
bad faith.
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Blank
Chapter 7Steer the deal safely to legalcompletion
Effective commercial due diligence is vital
Environmental due diligence needs to be done on every deal
Financial due diligence must include profit forecasts
and the order book
Pension due diligence
Legal due diligence should include contractual issues
and regulatory compliance
Assess the disclosure statement by the vendor
and negotiate changes
Prepare to announce the deal internally and externally
A Thorogood Special Briefing
Chapter 7Steer the deal safely to legalcompletion
Attractive deals sometimes fail to complete after signed Heads of Agreement
because no one is accountable for steering the deal safely to legal completion.
Either your corporate finance adviser or an in-house executive must have personal
accountability to ensure that legal completion is achieved within the agreed
timetable, unless there is good cause.
Effective due diligence has to be carried out and the legal work completed. Some
large accounting firms offer a one-stop-shop service for all the due diligence
required. Accountancy firms are demonstrably equipped to handle financial and
tax due diligence, provided they have specialist teams carrying out this work
on a full-time basis. Commercial environmental and pensions due diligence are
at least equally important, however, and you need to be satisfied that their individ-
uals have the depth of experience required, otherwise appoint specialist firms.
Effective commercial due diligence is vital
Some corporate acquirers regard commercial due diligence as an optional extra,
which is nonsense and dangerous. Private equity firms insist on commercial due
diligence and they are right to do so. It is the underlying commercial well-being
of the target company which will determine the short to medium-term success
of the acquisition.
The key requirement for a firm adequately equipped to carry out the work for
you is that they will field a team with personal experience of the market segments
and countries involved. Never let advisers learn at your expense.
The purpose of commercial due diligence is to answer questions such as:
• Which companies are the market leaders, and what are their business
models and competitive advantages?
• What are the underlying market, technological, legislative and social
changes affecting the sector and their likely impact?
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• Which overseas competitors are emerging and what do they offer?
• Is over or under-supply anticipated in the short to medium-term in
the sector, and how are companies likely to react?
• Which competitors of a similar size to the target company are
succeeding and why? And which are failing?
• How do customers, former customers and non-customers regard the
target company?
• How is the target company rated as an employer?
Clearly, this is highly skilled work which requires contact with relevant compa-
nies to gain the necessary information, but without remotely revealing that the
target company is for sale.
Environmental due diligence needs to be done on every deal
It would be folly to assume that because the target company occupies new offices
on an attractive site there can be no environmental risks. It is the previous use
of the site which determines whether or not there is an environmental liability.
You may be quite happy not to worry about environmental issues on acquisi-
tion, but the real probability is that the next acquirer will and this will cost you
money should you wish to sell the business or relocate to another site.
Over the years there has been growing environmental legislation which
companies must follow. It is essential that a check is carried out to ensure that
all compliance work has been carried out, proper records kept and action taken
as necessary.
Previous usage of the land may well give strong indications of potential site
damage. Oil storage suggests leaks, which may need expensive clean up work.
On one site, routine testing revealed that animal remains had been buried in
shallow pits and were regarded as an environmental hazard. The clean up work
cost a six figure sum, but at least the acquirer had the upper hand to negotiate
an adjustment to the deal value.
Without question, environmental due diligence is specialist work and requires
appropriate expertise. The cost should be regarded as an insurance to protect
against discovering an expensive liability later.
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Financial due diligence must include profitforecasts and the order book
It is totally inadequate for the financial due diligence merely to adopt an audit
approach up to the date of legal completion, even if the purchase considera-
tion is being paid in full on that date.
In these circumstances, some vendors react emotionally and argue that the deal
value is not dependent upon future performance because it is not mentioned
in either the Heads of Agreement or the draft Share Purchase and Sale Agree-
ment, which is the prime legal document for the acquisition. This may be so,
but it is a naïve response. Clearly, the acquirer values a business to reflect likely
future performance. So you must be persuasively insistent that your due diligence
will include:
• forecast current year financial performance
• financial projections given by the vendors for any subsequent years
• the adequacy and validity of the order book, for example the optimistic
approach of including ‘reservations’ as part of the order book or
statistically weighting possible orders to boost the figures
• the terms of facilities management contracts with clients, which may
range from three to seven years in length, but contain a clause that
the client can terminate the contract unilaterally for unsatisfactory
performance with only 90 days notice
If this work reveals an unsatisfactory picture then remember that you have the
right to seek to renegotiate the deal or even withdraw.
Taxation and VAT matters are important. The fact that the acquirer will have a
full cost indemnity for pre-completion liabilities should be regarded as inade-
quate comfort. Ideally, taxation and VAT returns will have been submitted on
time and agreed with the Inland Revenue.
You need to recognize that a major issue may take more than two years to resolve
with the Revenue. In the meantime, you will have to instruct and pay tax advisers.
Furthermore, the Inland Revenue may insist on interviewing senior manage-
ment. The final settlement may include a full repayment of tax liability, plus interest
for the late payment and a penalty charge. If the issues are sufficiently signifi-
cant, you may wish to delay legal completion until agreement is reached with
the authorities.
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If the tax due diligence reveals any significant issues, it makes sense to insist
that an adequate sum is held in escrow to ensure that the funds are available
to meet the anticipated liability.
Pension due diligence
Gaping deficits in pension funds have become a regular feature in the financial
pages. For FTSE 100 companies, deficits of more than a billion pounds have
occurred. It would be entirely wrong, however, to think that pension deficits
occur only in large quoted groups.
Fortunately, final salary pension schemes are uncommon among unquoted
companies and these are the prime cause of deficits. Nonetheless, it is essen-
tial that due diligence is carried out on every pension scheme and any deficit is
reflected in an adjustment to the purchase price.
Legal due diligence should include contractualissues and regulatory compliance
Fortunately, legal due diligence is an integral and familiar part of the role of a
solicitor who handles acquisitions and disposals on a full-time basis.
Obviously, freehold and leasehold issues will be addressed but contractual issues
and regulatory compliance need to be covered as well. Contractual issues include
any matter where there is a clause which refers to a change of ownership or
majority equity control. This could cover customer contracts, exclusive supply
contracts with an overseas supplier and share option schemes which would enable
senior executives to realize a substantial capital gain. The reality in most cases
will be that the acquirer is stuck with these provisions, and a commercial assess-
ment of the risks has to be made.
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Assess the disclosure statement by the vendor and negotiate changes
The disclosure statement is potentially a sucker punch. Some vendors will do
their best to avoid handing over the disclosure statement until the day of comple-
tion, but it is in essence an addendum to the Share Purchase and Sale
Agreement which can negate or undermine your hard won indemnity and
warranty clauses.
Solicitors to the vendors should, and usually do, insist that a complete disclo-
sure statement is made. It is not uncommon for the disclosure statement to be
a briefcase full of miscellaneous documents, which requires several hours to assess
the implications and, more importantly, time to negotiate/insist on amendments.
The timetable to legal completion should state a specific date for the receipt of
the disclosure statement by the acquirer, and this should be several days before
legal completion. It is too late to follow up the non-receipt of the disclosure state-
ment on the due date. Follow up needs to take place well in advance to ensure
that there is adequate time to assess and renegotiate as appropriate.
Corners must not be cut. If the disclosure receipt does not allow adequate time
to assess and renegotiate, then legal completion should be delayed.
Prepare to announce the deal internally and externally
Whilst the due diligence and legal work is carried out, the acquirer should prepare
detailed plans to announce the acquisition on legal completion to:
• staff
• customers and suppliers
• regulatory authorities
Some acquirers concentrate only on announcing the deal to the management
and staff of the target company, but the existing staff need to be informed as
well because they may be anxious about likely redundancies and relocation. With
modern technology, there is ample scope to make a welcoming and persuasive
approach to new staff, but this does not eliminate the need for face-to-face
meetings to answer questions, doubts and fears. If you don’t do it, the
grapevine will and inevitably you will suffer.
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Email allows you to contact customers and suppliers immediately. This is not
enough, however, for companies important to your future. Personal visits should
be arranged and ideally involve more senior people on both sides than those
involved in the everyday conduct of the trading relationship.
The notification of regulatory authorities is good housekeeping but important
nonetheless, and it should be done promptly.
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Chapter 8Post acquisition management: Turn around loss makingcompanies effectively and quickly
Make an initial impact
Set up reporting relationships and authority limits
Establish clear rules for handling the media
Keep head office interference to a minimum
Get an overview of the business
Start with the sales team
Scrutinize overhead and administration costs
Tackle production and procurement costs… and opportunities
Set relevant short-term forecasts and objectives
Financial planning and control need clear priorities
Create a budget for the new financial year
Examine research and development
Address the medium-term future for the business
Make redundancies urgently and humanely
A Thorogood Special Briefing
Chapter 8Post acquisition management: Turn around loss makingcompanies effectively and quickly
The turnaround of a loss-making company acquisition needs to be starkly different
from the approach adopted for a company which is performing satisfactorily
or well.
The key to a successful turnaround is a full-time chief executive, a part-time
appointment is inadequate when an acquisition is loss-making and haemor-
rhaging cash. Urgency is of the essence. Furthermore, it is strongly recommended
that the prospective chief executive is intimately involved in the decision to acquire,
otherwise you face the risk of being told later “I would never have bought this
company” which may well be an excuse of a failing chief executive.
Ironically, chief executives of successful businesses are often ill-equipped for
turnaround success. They are used to a measured and evolutionary approach,
whereas a turnaround demands urgency and at times a somewhat brutal approach.
The purpose of this chapter is to outline a tried and tested approach to achieve
a successful turnaround. It is unlikely that losses have resulted from a lack of
effort by management and staff. The need is to redirect effort, rather than increase
it, and to focus on results.
Make an initial impact
The first and urgent task is to ensure the company is not trading illegally and
that sufficient cash flow will be generated to allow the company to survive in
the short-term. The existing management will probably expect and want
immediate action from the new executive. Furthermore, they will expect the action
to be tough. The executive will be rightly concerned about his or her ignorance
of the company. Radical organizational change or the switching of key
personnel, if implemented too quickly, might prove to be misguided measures
in the months to come. Nonetheless, some impact can be made immediately, as
outlined below.
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Temporary help
Terminate all temporary help immediately and fill the resulting gaps by
redeploying existing permanent staff. If this causes a real problem, someone
will scream loud enough. In the end the business is unlikely to suffer.
Indirect staff
Insist that the recruitment of all indirect personnel (part of the company overhead),
including replacement staff, will need chief executive approval before any action
is taken. Review all indirect staff recruitment in progress. Stop all hiring except
where an exhaustive check of existing staff availability reveals an unquestion-
able need.
Direct staff
If there is any likelihood that some redundancies will be necessary in due course
amongst staff directly involved in producing and delivering the product or service,
then any recruitment should require chief executive approval. This applies partic-
ularly in those countries where staff costs should realistically be regarded as
fixed in the short-term, rather than variable, because of the difficulty and cost
of terminating any employee.
Fixed assets
Insist that all capital expenditure above a given level is approved by the chief
executive. Wherever possible, delay non-profit projects such as the replacement
of staff dining-room equipment, refurbishing car parks, etc. Ask that unused
plant and machinery be identified with a view to disposal, and that under-utilized
floor space be identified so that the use of facilities can be rationalized in due
course.
Inventory
Ensure that significant purchases against anticipated special orders receive chief
executive approval. Material purchases should be allowed to proceed normally
when covered by firm orders or when part of a standard product specification
provided that stock levels are not excessive. Ask that all redundant stocks be
identified and vigorous attempts made to dispose of the surplus at whatever
price can be obtained.
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Offices and office equipment
Cut back sharply on the redecoration of offices and the routine replacement of
office equipment. The order of the day should be to ‘make do and mend’ wherever
financially justified.
Personal cars
Delay, wherever possible, the replacement of cars supplied and maintained by
the company, and keep the authorization of additional cars to an absolute
minimum.
Foreign travel
All foreign travel should require chief executive approval. In one actual
example, the marketing manager had arranged a three-week visit to Brazil in
order to assist the company’s local distributor to expand sales. A request for a
visit programme listing the companies and executives to be visited quickly estab-
lished that no such planning had been done. The approval was deferred until
such time as the local distributor had arranged an effective itinerary. Six months
later the application still had not been re-submitted.
Where significant costs are incurred on travel between various company locations,
it may be possible to make savings quickly by using video conferencing techniques.
Entertaining
Check expense claims to ensure that any entertaining of clients is not unnec-
essarily lavish. There is more at stake here than the cost of the entertaining; in
a loss-making company many employees justifiably feel bitter when they hear
about expense of this kind.
The impact of a series of immediate actions such as those listed above (not an
exhaustive list) really gets the message across that the decks are being cleared
for action. The objective is to make the most effective use of the human and
material resources already employed in the business. Admittedly, the impact of
these actions is likely to be more important in terms of the effect on employee
attitudes than on profitability and cash flow; but some tangible improvement
will almost certainly result. Clearly, the turnaround executive will want to reduce
the list of actions requiring personal approval as soon as his or her values and
standards are shared by the management team.
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Set up reporting relationships and authority limits
Select the key people with whom you want regular and close contact, at least
for the time being, to address short-term problems. This does not imply creating
a new organization structure, which would be premature, but is intended to create
effective management communication.
No chief executive can effectively authorize every item of revenue expenditure,
so authority limits should be delegated to selected people as soon as possible.
Establish clear rules for handling the media
This may seem a strange priority at the outset, but it is an essential one. For
example, a disgruntled employee may mischievously alert the local press to the
threat of imminent redundancies. Alternatively, there may be an accident or
whatever. It should be made clear that the only contact with the media is to be
via the chief executive. If a member of staff is contacted by the media, they must
know exactly the response to be given.
Keep head office interference to a minimum
Well-meaning head office executives love an acquisition, because it gives them
an excuse for a day out and an expenses paid lunch. This not only wastes precious
management time but it sends completely the wrong message to a loss-making
subsidiary.
Similar follies are the despatch of the group HR manual, or such like, which in
an actual case was sent with a compliments slip stating ‘for immediate imple-
mentation’. Equally, e-mail requests for statistical information are a waste of time.
At the outset, the turnaround chief executive must insist that all head office
communication is made via him or her for the time being.
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Get an overview of the business
Now the turnaround programme may be started in earnest. The first task is to
understand what is happening in the business, before taking precipitate execu-
tive action. What is more, the answers necessary for short-term success are likely
to be found amongst the middle and senior managers of the company. The key
questions to be asked of people by the turnaround executive are as follows:
• What key factors are stopping you and the business being more effective
and successful?
• What inexpensive and simple action would have a substantial effect
on the performance of the company?
• What extra help do you need to do your job more effectively?
• What tasks could be eliminated altogether or made simpler and more
effective?
• What is not being done that needs doing urgently?
Managers are often able to highlight a key problem area or opportunity in another
department of the company while not being able to see scope for improvement
in their own job. The turnaround executive needs to be a good listener who neither
takes sides nor apportions blame.
Start with the sales team
Even in a high-technology company there is the strongest case for trying to under-
stand the fundamental problems facing the business by examining the sales
activity first. Almost by definition, a loss-making company cannot claim to be
sufficiently customer and market-oriented. Ideally, every sales employee should
regard their job as helping to provide outstanding service to present customers
and anticipating the future needs of both established and potential customers.
In working to achieve this state of affairs, there is no effective substitute for making
field visits with sales staff, visiting agents and distributors, calling upon impor-
tant customers, potential customers and even important established users of
competitive products. Board meetings are unlikely to provide an adequate insight
into the sales and marketing issues facing the business.
Two weeks spent in the field represent an excellent investment of the turnaround
executive’s time at this stage. In this way, first-hand information can be obtained
about the product quality, service and delivery performance. Price competitive-
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ness, the benefits offered by competitive products, the effectiveness of sales and
distribution networks will begin to be understood as well.
Attention should next be focused on the sales office and sales support services.
The time already spent in the field will prove invaluable in asking the relevant
questions about the effectiveness of sales support. A good starting point is to
check how effectively action is taken on emails and telephone calls from customers.
Operating standards are vital. Enquiries and orders should be acknowledged
the same day. Complaints and requests for after-sales service require particu-
larly prompt attention. It is essential to notify the customer of the action being
taken without delay. General emails, too, should be handled promptly. When a
telephone query cannot be dealt with on the spot, a promise should be made
to call back by a given time, and that promise must be honoured.
Clearly the effective handling of emails and telephone calls is not a panacea for
the sales ills confronting a business. The attitude of mind that creates this type
of effectiveness, however, is a prerequisite for what needs to be achieved in the
coming weeks and months.
The turnaround executive will then want to evaluate other important aspects
of the sales operation. At this stage, the executive’s previous management experi-
ence and newly-gained knowledge of the present business will indicate which
aspects require attention. Aspects to evaluate may include:
• The existence of adequate targets, incentives, operating standards,
training and supervision for the sales force.
• The liaison between the sales and production departments to ensure
that the various customer demands and priorities are met in a cost-
effective way.
• The finished goods stocking policy used to ensure a balance between
meeting customer orders from stock and the attendant cost of holding
the inventory to achieve this goal.
• The acceptance of orders for custom-made products as opposed to
standard ones, and the basis for assessing the costs involved and the
price to be charged.
• The responsibility and basis for offering one-off, cut-price or discount
deals to customers or clients.
• The extent to which the sales people participate in helping to collect
overdue accounts from customers.
• The need to make the maximum use of information technology to help
the sales force improve the service to customers and clients.
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This is an intentionally simple approach, based on finding out exactly what
happens rather than installing sophisticated management systems and controls.
Successful turnarounds are usually initiated by executive action ensuring that
a few simple but important things are done outstandingly well. Installing some
basic management controls should wait until this first stage in recovery has been
effected.
It may appear somewhat illogical to investigate the sales activity before tackling
the broader issues of the market place and marketing; the reason for this is
pragmatic. Even a sketchy knowledge of the sales effort, problems and oppor-
tunities will lend considerable perspective to an understanding of the marketing
challenge facing the business. Important marketing aspects to be looked at include:
• Any major products or services in the research and development stage
for which there should be a clear-cut work programme through to
product launch with an attendant expense budget.
• Business development, including efforts to identify and pursue new
products, services, territories, market segments and distribution
channels.
• The effectiveness of sales promotion, advertising and exhibition
expenditure.
• The liaison between marketing and R&D to ensure that research projects
are based on market-oriented assessment of customer needs and
provisional product specifications.
• The extent, relevance and value of market research activity and data
within the company as a basis for future business development.
• The possible need for a reduction in the range of products/models and
services offered to the customers to ensure compatibility between
market needs and the cost-effective use of production resources.
Scrutinize overhead and administration costs
In the USA ‘burden’ is a word widely used for those costs. For a turnaround
situation, the word ‘burden’ is truly appropriate. Overhead and administrative
costs must be affordable, given the likely sales volume and gross margin in the
next year or so.
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The chief executive should have value analysis concepts very much in mind. He
or she will be asking themselves, and others, the reason for each administra-
tive activity, using the following type of questions:
• Is the work necessary to meet statutory, legal or fiscal requirements?
• If not, what detriment would there be to the business in either the short
or long-term if the particular task or department was eliminated?
• If the work still appears necessary, who benefits internally, and is the
existing service the most cost-effective and relevant approach?
• Are any administrative departments overstaffed or staffed to meet a
peak demand?
• Is there any administrative work not being done which would represent
both a tangible benefit and a net overall saving to the business?
• Are costs higher than necessary as a result of using expensive
contract staff?
• Could any services or departments be outsourced partially or completely,
to reduce costs without damaging the business later?
• Is maximum and cost-effective use being made of information technology
such as recent developments in data storage and transmission, direct
input and email?
• How can the number and layers of management be pruned without
the business suffering?
At the end of this learning period the chief executive should have got across
the message to the team that empire building and status symbols are out. The
order of the day is to provide a service which is relevant and represents value
for money.
Tackle production and procurement costs… and opportunities
In the same way that time was spent in the field in order to appreciate quickly
the sales and marketing problems, it is necessary to spend time in production
departments and warehouses to begin to understand the production challenge
facing the business. Good housekeeping is important. It is not just a question
of tidiness. If management and workforce alike do not take pride in their surround-
ings and adopt high standards, they are unlikely to take pride in the quality of
the products and services supplied to customers.
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On the very first visit to each location the chief executive should not hesitate to
point out any lack of good housekeeping and to expect rapid action to improve
the situation. Once again the premise is that major improvement throughout
the production process needs a basic change of attitude at the outset. The
turnaround executive will constantly be asking fundamental questions: Why?
How? What? The specific questions may include:
• What are the major constraints holding back increased output and
productivity, quicker and more reliable delivery performance, better
product or service quality and reliability, and reduced inventory levels?
• How can we overcome these constraints in the most effective and
inexpensive way in the shortest time possible?
• What should be done to improve the working conditions, motivation
and morale of the workforce? How much will this cost? What other
savings can be achieved to pay for it?
Set relevant short-term forecasts and objectives
Actual performance, measured in terms of sales, gross margin and pre-tax profit,
may be so far removed from the current year budget that new forecasts are
required.
The approach should be to ask directors to produce month by month forecasts
for the remainder of the year for:
• sales, ideally made up by product or service category
• gross margin percentage
• overhead costs
The chief executive should challenge the thinking behind these forecasts and
then make any amendments he or she feels necessary. This is not my recom-
mended approach to budgeting, but the early days of a turnaround demand
special measures.
A vital rough and ready calculation of a monthly break-even sales figure should
be calculated and communicated to the team.
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The arithmetic is very simple:
If monthly overheads are, say, £150,000 and the gross margin is, say, 30% then:
Monthly overheads ÷ £150,000
Gross margin percentage 30%
Break-even monthly sales = £500,000
This enables the chief executive to agree with the directors in which month break-
even will be achieved and to get their collective commitment to achieve this vital
goal on time.
Financial planning and control need clear priorities
Accurate and prompt financial planning and control are essential. The
company may have a relevant and sophisticated, integrated IT system, but the
old adage of ‘garbage in delivers garbage out’ applies particularly to a
turnaround situation.
Accurate monthly accounts demand accurate and prompt input from every
department. The reality may be sloppiness.
Ideally, the new chief executive would have an experienced turnaround finan-
cial manager from the outset. If this is not feasible, then the chief executive has
to spell out what is needed to the present incumbent. Not just the chief execu-
tive but the financial manager must listen to, talk and sell to the management
team what is required. It really does require financial management by walking
about.
Create a budget for the new financial year
The preparation of a budget for the coming financial year offers an opportu-
nity to pursue further the installation of effective short-term management within
the business. The management team has by this time had the experience of making
a commitment of a forecast for the current financial year and delivering that
commitment.
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The finance staff will have been directed about the scope, methods and format
required for financial planning, control and forecasting in the coming year and
will be ready to implement this, starting with the preparation of the annual budget.
Each member of the management team will be expected to back his or her budget
commitment with a quantified management action programme and a statement
of the key milestones to be achieved on business development projects. This will
ensure that there is a balance between the amount of executive time spent on
day-to-day management problems and that invested in pursuing projects to
achieve further profitable growth.
The chief executive must spell out that the directors have collective cabinet
accountability to achieve both the pre-tax profit and cash flow generation month-
by-month and annually. Reasons for a shortfall must be accompanied by action
to get the full year performance back on track.
Examine research and development
There is a strong temptation for the turnaround executive to avoid getting to
grips with the R&D activity because of a lack of technical expertise. The tempta-
tion must be resisted at all costs. It is perfectly admissible to admit to ignorance
of the technology involved, provided that the executive demonstrates a willing-
ness to appreciate the problems of and to take a lively interest in the work of
the department. This approach will almost certainly enhance the respect that
hopefully he or she has already earned. Questions to ask in the R&D depart-
ment may include:
• Who initiated each R&D project currently in progress?
• What budget and programme exists for each project? How does actual
performance compare with the original budget and programme?
• What financial return is expected from each project. What market
research data is this based on? What product specification and price
profile has been agreed with marketing and defined as the objective?
• What existing projects should be examined with a view to termination?
• What new projects should be initiated? For what reason?
• How can information technology be used more widely and effectively
to increase the productivity of R&D staff?
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• How can the Internet be used as a research tool to spur innovation
and to provide a valuable information resource?
• What is the allocation of R&D resources between basic research, new
product R&D and the improvement of existing products? Does this
allocation meet the future market opportunities and competitive
challenges facing the business?
• What is the current level of sales and marginal profit contribution
derived from products emanating from in-house R&D?
• What R&D work is outsourced or sub-contracted to other organizations?
Which projects or specific tasks should be outsourced or sub-
contracted in future?
Address the medium-term future for the business
The chief executive must not see the extent of the turnaround role as being the
elimination of losses. That is only the first step – and often the easier one. The
second stage is to achieve an acceptable return on the funds invested, or to dispose
of the business as a going concern.
If the requirement for achieving a turnaround has resulted from long-term
changes in the market place in which the company operates, then it will almost
certainly be necessary to re-position the business. This involves a planned
withdrawal from unprofitable products, services, market segments and terri-
tories, and developing or acquiring alternative business which offers adequate
profitability and future growth. The re-positioning of the business can take place
in several ways. For example, the company could decide to look for future growth
throughout, say, Europe; or it could concentrate on developing a higher quality,
higher priced product range; or it could develop its ability to sell custom-made
products profitably. A further option may be diversification to an extent which
requires either a joint venture or an acquisition.
While the turnaround executive may discuss ideas on the subject with other
managers, and may well invite their suggestions, the responsibility for decision
rests squarely on his or her shoulders alone.
In the end, the conclusion may be that the business should be sold as a going
concern to another company better placed to make an acceptable return from
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the funds invested. If so, the turnaround executive must have the courage to
present the facts to the board for approval. It must not be seen as a statement
of failure. In the final analysis, the management of opportunity is more
rewarding than the management of problems, from the standpoint of share-
holders, managers and employees alike. Once approval for disposal is given,
then the turnaround executive should expect to be actively involved, and probably
personally accountable, for identifying prospective purchasers and successfully
negotiating the sale of the business in conjunction with specialist advisers.
Throughout all this there will be uncertainty, anxiety and fear felt by workforce
and management alike. The turnaround executive must learn to cope effectively
and be a person of integrity with outstanding management skills and, above
all, the ability to communicate. It is important that he or she should appear
cheerful, assured and poised at all times. If there are signs of despondency or
being out of one’s depth, the effect on morale may be shattering. Both manage-
ment and workforce will look to the turnaround executive for confidence and
reassurance. The executive’s approach should be like that of the dentist who,
at the outset, describes to the nervous patient the nature of the treatment he or
she is about to receive and then explains each step.
Two other aspects of communication are important: making promises and dealing
with rumours. From the very start the turnaround executive must not make any
promises which are either beyond his or her control or beyond present horizons.
It is not unusual to be asked on the first day if an assurance can be given that
there will be neither redundancy nor office relocation within, say, the next six
months. At this stage, the turnaround executive is not able to give such an under-
taking. The other feature of a turnaround situation is the proliferation of rumours
from top to bottom of the organization. Rumours must be flushed out into the
open as quickly as possible, and an appropriate statement made by manage-
ment. Rumours left undealt with merely fuel the anxiety which already exists.
In conclusion, it can be said that every turnaround situation presents a unique
set of problems. There are no ready-made answers. The outcome of a successful
turnaround is defined as achieving an adequate return on the total funds invested
in the business, and not simply as the elimination of loses. The methods outlined
for handling the situation successfully are based on taking effective executive
action initially, rather than concentrating on improved management control
systems and procedures. The key to success is to concentrate on doing a few
simple but important tasks outstandingly well, and to communicate confidence
and reassurance to managers and staff throughout the business.
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Make redundancies urgently and humanely
I have deliberately left the most powerful issue to last. Neither managers nor
employees will be grateful to you for delaying the inevitable need for redun-
dancies. They will recognize the situation and there will be a ‘sigh of relief’ when
the redundancies are announced. A piecemeal approach to reducing the
workforce has a devastating effect on morale. Nevertheless, if the situation was
sufficiently serious to warrant earlier redundancies, then no doubt they would
have happened.
Consideration should be given to making use of temporary staff, short fixed-
term contracts for staff and outsourcing as part of a review of current staffing
levels.
Each member of the management team should be asked to produce a list of people
either to be made redundant or transferred internally. The information required
in addition to the names of the people affected is their job title, length of service,
annual income, notice period and the cost of termination.
This part of handling a turnaround situation is undoubtedly the most unpleasant
aspect of the job. The executive reluctantly responsible for this task must do the
utmost to ensure that people are treated fairly, and as generously and compas-
sionately as possible. Failure to recognize the need for a reduction can only result
in putting the jobs of everyone in the business at risk.
One thing the chief executive must ensure is that the scheme to reduce the number
of staff covers the entire business, from workforce through to senior manage-
ment; otherwise a top-heavy organization may well result. Clearly, however, to
meet the future needs of the company some departments will need to suffer
heavier cutbacks than others.
The next aspect to be stressed is confidentiality and security. If anyone other
than the turnaround executive’s secretary does the word processing and copying,
the information might as well be put on the company notice board. Detailed
planning should be carried out to arrange for all severances to be notified and
executed at the same time, so that uncertainty and anxiety among the remaining
personnel can be kept to a minimum. Equally important, appropriate notifica-
tion should be given to staff unions and government departments in accordance
with the highest standards of custom and practice of the particular country.
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Blank
Chapter 9Utilize expert streetwise tactics
Discuss the structure and form of consideration
before making a written offer
Realize that too low an initial offer may lose the deal
Reveal any onerous conditions early to reduce their impact
Spell out and sell your management approach
Recognize that your conduct prior to completion is crucial
When negotiating the final deal it is unlikely that
the vendors can justify a higher offer
Criticizing the business to the owners must be avoided
Quid pros quos are an effective way for win-win negotiation
When no agreement is reached, keep the door open
A Thorogood Special Briefing
Chapter 9Utilize expert streetwise tactics
The tactics you adopt and your personal conduct are likely to determine whether
or not you successfully legally complete an acquisition. The level of your offer
alone, unless it is overgenerous, does not ensure you will succeed.
To acquire a company you have to sell:
• yourself – as a trustworthy, reliable and friendly person to do business
with
• your company, management style and post-acquisition management
approach
• your offer – which meets the particular needs of the vendors even
though it may not be the highest offer
Discuss the structure and form of considerationbefore making a written offer
If you decide to make a written offer without discussing the level of your offer,
structure and form of consideration, you are shooting in the dark and may well
miss your target, without a second chance to succeed.
At this stage, it is worth outlining the total value of your offer as a range in order
to give you room for manoeuvre. As well as listening to what the vendors say
in response, do watch their eyes, facial expression and body language. Non-
verbal responses are likely to be more honest!
If you are insistent on an earn-out deal, where the deferred purchase consid-
eration is contingent on achieving profit targets, typically over the next two
financial years, do make it clear that this is a must for you. At this stage I advise
against using the words ‘it is a deal breaker issue’ because it may prompt an
angry and emotional response. Outline the amount of purchase consideration
you will pay at legal completion, which should reflect reasonably – but not
overgenerously – the value of the company today. Sell the earn-out considera-
tion as an opportunity for the vendors to be paid for future success and necessary
protection for you against identified vulnerabilities.
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Some acquirers fail to realize that the form of purchase consideration can be a
deal breaker issue for some vendors. For example, a £40M market capitaliza-
tion AIM listed company may insist that 50% of the purchase consideration is
payable in their shares. Also, there may be an embargo preventing the vendors
from selling any shares for one or two years. The acquirer will need to be really
persuasive to sell this structure.
Some private companies seeking to acquire may offer 50% of the purchase consid-
eration in the form of an interest bearing loan note, with the capital repayable
in three annual instalments. If it is a bank guaranteed loan note or an insurance
bond there is adequate security, but a guarantee only by the acquirer leaves the
vendors potentially vulnerable. Once again, real persuasion will be needed.
Based on these discussions, you are much better placed to formulate an offer
with a decent chance of acceptance. But go one step further, within 24 hours
of the receipt of your offer, telephone the vendors to clarify and discuss any queries
they have.
Realize that too low an initial offer may lose the deal
This is best illustrated by an actual sale where I advised the vendors. The company
was an attractive opportunity and prospective acquirers were told, before making
an offer, that there were five serious acquirers ready to bid. Four offers we received
in the £12M to £14.5M range, and a Footsie 100 company offered £8.5M. They
were invited to submit a significantly improved offer, but declined despite the
fact that they had most to gain from the acquisition.
The business was sold for £15.5M, and about three months later I met the £8.5M
bidder at a seminar. He told me that he had authorization to bid up to £20M,
but was convinced I was bluffing and he could impress his boss by pulling off
a cracking deal. To compound matters, he said I would have happily paid up to
£20M. I leave you to form your own judgment on his tactics.
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Reveal any onerous conditions early to reduce their impact
What is onerous rests in the opinion of the vendors. For example, shortly after
shaking hands on a written offer I told the vendor that his 26 year old son would
have to give up his job as Marketing and Sales Director. The business employed
over 1,000 staff and 60% plus of sales were overseas, and the son was simply
far too inexperienced and a playboy to boot.
The vendor literally erupted with anger. I never said a word until the emotional
outburst had subsided. Half an hour later, he agreed and with good grace.
It was a deal breaker issue, but left until immediately prior to legal completion
or shortly afterwards, the vendor could justifiably regard the requirement as
an act of bad faith and be left pondering what other nasty surprises would be
revealed.
Spell out and sell your management approach
Vendors worry about lots of things, and an astute acquirer will find out what
these are and address them. Typical examples are:
• job titles
• reporting relationships with the acquirer
• cheque signing authority
Of more substance, however, is the management approach you will adopt post-
acquisition. An effective way to sell this is to introduce the vendors to the owners
of a business you have acquired during the past two years and allow them to
meet without any group people present.
The concerns of vendors often centre on procedures such as:
• annual budgeting
• monthly reporting and updated year end forecasts
• capital expenditure appraisal
• attendance at formal board meetings
• interference by group executives
Your job is to promise help and give reassurance, stressing that it is vitally impor-
tant that you maintain the entrepreneurial flair of the business within a group
framework.
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Recognize that your conduct prior to completion is crucial
At worst, an overly aggressive approach may lose you the deal because the
vendors decide not to do business with you. It does happen, I promise you. More
likely, however, you may find that post-acquisition management is more diffi-
cult because an effective rapport has not been established.
Deal breaker issues should be kept to an absolute minimum, probably not more
than two or three, if you are to succeed. Threats, ultimatums and unrealistic
deadlines do happen and provoke a predictable response from the vendors. Your
goal must be to have established a first class rapport with the vendors and have
agreed post acquisition plans prior to legal completion so that the deal gets off
to a flying start.
When negotiating the final deal it is unlikelythat the vendors can justify a higher offer
The reason is simple. Vendors are keen to reveal all of the potential opportuni-
ties before you value the company and make your offer. So it is unlikely there
is adequate reason for you to increase your offer.
I really do believe that any increase should be modest and made in exchange
for something which is valuable for you.
Criticizing the business to the owners must be avoided
This is a cardinal sin! You cannot gain from these tactics, and are likely to alienate
the vendors. Yet some acquirers use this tactic to justify not increasing their offer.
The positive way is to express your justifiable concerns about some of the vulner-
abilities the business faces.
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Quid pros quos are an effective way for win-win negotiation
You should regard any increase to your written offer as a ‘give away’ without
any justification to do so, unless you get something in return which is at least
equally valuable to you.
Please do not dismiss this approach as simply playing with words. It is not! Be
prepared to ask the vendors what they are prepared to offer you in return for
an increase or concession from you. Their answer may surprise you and more
than fully justify your action. If they do not come up with any attractive sugges-
tions, be ready to put ideas to them.
When no agreement is reached, keep the door open
Where you have made an unsolicited approach to acquire and your offer is
rejected, you should maintain regular contact at, say, quarterly intervals. Agree
to meet for lunch, attend a trade dinner together or extend an invitation to a
corporate hospitality event. Vendor circumstances may and do change suddenly
and abruptly. The discovery of a terminal illness or a major family disagreement
are just two examples.
Another situation is where your offer is rejected and the vendors sign Heads
of Agreement and give a period of exclusivity to another acquirer. A surprising
number of deals fail to complete at this stage. Reasons include unsatisfactory
due diligence causing the acquirer to withdraw or reduce their offer; deal breaker
issues which could not be resolved and a failure by the acquirer to finance the
deal or to offer adequate security for deferred consideration.
Make it clear to the vendors that your door is still open if problems arise. If they
do come back to you, the reasons given for non-completion may be less than
truthful. Your negotiating position is now dramatically stronger. Be ready to forget
your previous offer. Get the vendors to update you on current trading and be
prepared to make a lower offer. Failure to legally complete after Heads of Agree-
ment comes as a bitter blow to most vendors. It is understandable that they are
hugely disappointed and may well be prepared to accept a lower offer. Seize
the opportunity!
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Chapter 10Choose and appoint advisers with care
Identify the help and advice you need and want
Recognize the advice and help which is available
Create an effective beauty parade to select advisers
Always agree fees and negotiate the engagement
letter before appointment
Telephone references on individual advisers really are valuable
Ensure advisers keep you informed of progress
A Thorogood Special Briefing
Chapter 10Choose and appoint advisers with care
My golden rule is that an adviser must never be allowed to learn at your expense!
Sadly, some advisers are all too willing to do just that. So always make sure that
the lead adviser has relevant expertise and experience.
Identify the help and advice you need and want
The first step is to recognize the work which should be done in-house:
• formulate your acquisition strategy based upon your corporate goals
• translate your acquisition strategy into an acquisition profile to focus
your search
Whether or not you can do the remainder of the work in-house depends upon
the people you can make available with the expertise and experience needed.
Acquisition work is often seen as exciting by internal people and you must make
sure that they do not learn at your expense or that important day-to-day work
suffers.
The other stages involved include:
Carry out an acquisition search
In the UK this can be done in-house by a suitable commercial person with some
sector knowledge. Overseas, the only real way to carry out an effective search
is by using someone based in the country to make initial contact with target
companies.
A UK search can be done in-house but it requires the managing director to be
involved. The most effective way is to telephone the decision-maker within a
target company and to extend an invitation to lunch to discuss mutual oppor-
tunities. Towards the end of the lunch, you can mention that you have always
respected the target company and whenever a sale is to be considered you would
be interested.
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It is time consuming for the managing director because ten approaches, and
ten lunches, may be needed to find a relevant opportunity.
In contrast, a corporate finance adviser can telephone the decision-maker on
behalf of a client, un-named if necessary, to explore an acquisition with the promise
that the client will be named at a first meeting. Curiosity plays a part and the
prospective vendors may be prepared to meet the adviser.
Meet the vendors to obtain a picture of the business
If both sides agree to progress matters, the next step is for the managing director
to persuade the vendors to spend half a day exchanging information so that a
written offer can be made.
I passionately believe that unless the prospective acquirer is able to handle this
information gathering meeting, and does so, they are not equipped to make an
acquisition!
The information gained from this meeting should be used to decide:
• whether or not to make an offer
• the level of the offer
• the deal structure proposed
Meet the vendors to discuss your offer
If you intend to use corporate finance advisers, they should be involved at this
stage to:
• review and challenge the level of the offer you intend to make
• provide advice on an earn-out deal structure
• act as a buffer between you and the vendors
• and continue to be involved to legal completion
Formulate the written offer
This requires a background knowledge of relevant company law, taxation, stamp
duty and VAT implications. Earn-out deals are a potential minefield for any
acquirer, and it is essential that the formulation of the offer is done by someone
with ample experience
10 CHOOSE AND APPOINT ADVISERS WITH CARE
95A THOROGOOD SPECIAL BRIEFING
Negotiate the Heads of Agreement
Once again, a corporate finance adviser can act as a buffer and ensure that the
Heads of Agreement are technically sound regarding company law, taxation,
stamp duty and VAT.
If a corporate finance adviser is involved, there is no need whatsoever to involve
a solicitor at this stage.
Carry out due diligence
Due diligence costs have to be paid even if the deal is aborted at the last minute,
but I regard it as valuable protection for the acquirer. Unless you have in-house
specialists regularly involved in due diligence, outside advisers should be used.
Handle the legal work
Unless you have in-house solicitors handling your acquisition and disposal work,
I regard it as essential to use a firm of solicitors with at least one partner handling
acquisitions and disposals on a full-time basis.
Recognize the advice and help which is available
The types of advice you may need are:
• acquisition search and initial contact with vendors
• corporate finance
• due diligence
• legal
Major accountancy firms may well offer you a one-stop shop for all the advice
you require, but be wary!
In recent years, specialist advisers have emerged to handle the initial search and
contact with prospective vendors, as well as commercial due diligence. Make
sure you meet at least one of these firms as your prospective adviser.
Corporate finance advice is available from both major and medium-sized account-
ancy firms, as well as from independent corporate finance boutiques.
TRADE SECRETS OF BUSINESS ACQUISITIONS
96 A THOROGOOD SPECIAL BRIEFING
Accountancy firms regard due diligence as their domain. But they may not be
equipped to handle everything which is involved. Commercial due diligence
involves much more than bringing a commercial awareness to financial due
diligence. Environmental and pensions due diligence demand expert advice.
Legal work should be handled by a firm of solicitors of a suitable size whereby
the transaction will be handled personally by a partner. If you go to a major
multinational law firm you may pay considerably more and have the work done
overwhelmingly by a manager.
I would like to believe in the effectiveness of Chinese walls, but struggle to do
so. You will be assured that a firm offering both corporate finance advice and
due diligence, will not be compromised by the need for you to risk the deal by
renegotiation as a result of due diligence findings. A one-stop approach does
create potential conflicts.
Create an effective beauty parade to select advisers
I believe that a beauty parade should involve no more than three of four prospec-
tive advisers for each type of advice. Firstly, identify suitable firms to select. The
tried and trusted method of asking business acquaintances for suggestions is
an obvious starting point. Trade press magazines may contain articles or case
studies written by advisers, and news of completed deals may name the advisers
involved. Internet search and reading websites is another source.
If you are unsure which individual to contact, telephone the personal assistant
to the senior partner and ask who is the relevant partner to handle the size,
complexity and business sector of your deal. When you speak to the person,
outline your needs and the agenda you wish to address when you meet.
At the meeting, questions to be asked of any professional adviser include:
• What transactions of similar size and complexity have you personally
completed in this market sector or a similar one?
• Which transactions have you personally completed in the last 12 months
and what were the deal values?
10 CHOOSE AND APPOINT ADVISERS WITH CARE
97A THOROGOOD SPECIAL BRIEFING
A crucial piece of information to obtain is an indication of the likely fee, and
the basis for charging. Due diligence will inevitably be a fixed fee regardless of
whether or not you legally complete a deal.
Acquisition search and initial contact with target companies should be carried
out for a fixed fee, which does not deliver any profit to the adviser, and a
percentage scale fee for a legally completed deal.
Corporate finance advice should be charged for work done up to a set limit and
a fixed success fee payable only on legal completion. Disbursements payable
should cover only out-of-pocket expenses up to a given limit. It may be wrong
to select the lowest fee quoted, but you can use this as a negotiating tool with
your preferred adviser.
Lawyers should be asked to give a budgetary fee estimate, based on the deal
as described, which will only be increased if they can demonstrate that the actual
complexity involved requires more work. Also, it may be possible to negotiate
a maximum fee for work done and a reasonable success fee payable only at legal
completion.
When meeting prospective advisers, do obtain a copy of their standard letter
of engagement because some contain onerous clauses stacked heavily in favour
of the adviser.
Always agree fees and negotiate theengagement letter before appointment
This may seem patronizing nonsense! Of course, everyone would always do this
– but they don’t.
Clients treat solicitors with undue respect, to the point that they do not even
raise the subject of fees. This is nonsense. A solicitor will respect you much more
if you talk openly about fees at the first meeting and are ready to negotiate.
Major accountancy firms often have onerous letters of engagement. Recently,
one accountancy firm told a prospective client that work should commence and
the engagement letter could be agreed later. What nonsense! No less than 17
amendments were made prior to their appointment, albeit reluctantly on their
part.
TRADE SECRETS OF BUSINESS ACQUISITIONS
98 A THOROGOOD SPECIAL BRIEFING
Telephone references on individual advisers really are valuable
Questions to be asked of the lead adviser should include:
• May I have the name, job title and telephone number of three clients
for whom you have completed deals, if I decide in principle to appoint
you?
• Will you be present at every meeting I wish you to be?
• What will happen if you are on holiday or ill?
• Who else will be in your team and what is their role?
• What is your fee proposal?
Questions to be asked of previous clients include:
• Did the adviser personally lead the team for you and attend meetings
when you felt it appropriate?
• Did you get an outstanding deal, first class service and value for money?
• What things annoyed or irritated you?
• Would you unhesitatingly appoint the adviser again?
• How should I get the best out of the adviser?
• How enjoyable was it to work with the adviser?
Chemistry and style are truly important and this will become apparent during
long, tedious and contentious negotiation meetings.
Ensure advisers keep you informed of progress
Too many advisers simply fail to keep you informed of progress or the lack of
it. This is simply not good enough. Ask each lead adviser to telephone or email
you weekly. The old adage of no news is good news does not apply to successful
business acquisitions!
In particular, the momentum needs to be maintained between signing Heads
of Agreement and legal completion. Make sure either your lead corporate finance
adviser or a senior in-house executive steers the deal safely to legal completion.
10 CHOOSE AND APPOINT ADVISERS WITH CARE
99A THOROGOOD SPECIAL BRIEFING
I conclude with a sobering thought, you will not know whether your acquisi-
tion is a success until one or two years after legal completion, and I wish you
every success.
TRADE SECRETS OF BUSINESS ACQUISITIONS
100 A THOROGOOD SPECIAL BRIEFING
Commercial Contracts: Drafting techniques and precedents
Ribeiro, Robert £169
ISBN: 978-185418271-5
This report takes you through the drafting processgiving practical guidance from start to finish. Withup-to-the-minute information on key cases andmaterials and in-depth analysis of the importantdrafting issues, it is a must for all those who needto draft commercial contracts.
Commercial Litigation: Damages andother remedies for breach of contract
Ribeiro, Robert £169
ISBN: 978-185418397-2
A great deal has changed in the last few years...a new emphasis on claims for damages such asloss of business, opportunity, chance, use and dataand recent landmark cases have altered theground-rules. Completely updated, this reportincludes accounts of all the most recent importantcases and highlights significant changes in the waythat the courts now assess damages.
Corporate Governance
Martin, David £85
ISBN: 978-185418354-5
This report is a clear, accessible and jargon-freeanalysis of the practical application of CorporateGovernance. With short case studies to illustratelegal requirements, the author guides the readerthrough all aspects of the Corporate Governanceprogramme, concentrating specifically on its useby organisations who are not required to adoptit, such as listed PLCs.
Email: Legal issues
Singleton, Susan £80
ISBN: 978-185418256-0
What are the chances of either you or your employ-ees breaking the law? This report explains clearly:
• How to establish a sensible policy and whetheror not you are entitled to insist on it as binding
• The degree to which you may lawfully moni-tor your employees’ e-mail and Internet use
• The implications of the Regulation of Investi-gatory Powers Act 2000 and the ElectronicCommunications Act 2000
• How the Data Protection Act 1998 affects thedegree to which you can monitor your staff
• What you need to watch for in the HumanRights Act 1998 and TUC guidelines.
Freedom of Information Act
Singleton, Susan £95
ISBN: 978-185418347-7
The FOI Act gives companies and individualsimportant powers to request information frompublic bodies. Are you equipped to take advan-tage and to protect yourself?
International Commercial Agreements
Attree, Rebecca £95
ISBN: 978-185418286-9
A major report on recent changes to the law andtheir commercial implications and possibilities. Thereport explains the principles and techniques ofsuccessful international negotiation and providesa valuable insight into the commercial points tobe considered as a result of the laws relating to:pre-contract, private international law, resolvingdisputes (including alternative methods, such asmediation), competition law, drafting commonclauses and contracting electronically. It alsoexamines in more detail certain specific interna-tional commercial agreements, namely agency anddistribution and licensing.
BUSINESS AND COMMERCIAL LAW
Other specially commissioned reportsfrom Thorogood
For full details of any title, and to viewsample extracts, please visit:
www.thorogoodpublishing.co.uk
Intellectual Property Protection andEnforcement
Brazell, Lorna £159
ISBN: 978-185418054-4
Incorporating the latest developments in IP law,this report reviews each of the principal forms ofintellectual property right available in the UnitedKingdom, describing the nature of the right itselfand explaining: How rights arise or can beobtained, How rights can be exploited, What isnecessary to protect rights from erosion or loss,What actions will constitute infringement of aright, under either civil (enforced by the owner)or criminal (enforced by public authorities) law,What remedies are available to the owner of theright, once infringement has been proved.
Each chapter can be read on its own for conven-ient reference, and the introduction to each chapteralso makes it clear where awareness of anothersection may be useful.
Waste Management: The changing legislative climate
Hand, Caroline £80
ISBN: 978-185418367-5
This valuable report explains what all the new leg-islation, directives and regulations mean in practiceand what you need to do to stay within the law.Recent far-reaching changes to the law and prac-tice affect everyone – commerce and industry,central and local government and householders.
Websites and the Law
Singleton, Susan £80
ISBN: 978-185418331-6
Is your company/client website legal? Do you knowwhat information you are required by law to puton it? What can you do with people’s personal datasent to your website? This report deals with all thepractical legal issues which arise with websites –both those sites which sell goods or services andthose which advertise.
Insights into Successfully Managing the In-house Legal Function
O’Meara, Barry £95
ISBN: 978-185418174-9
Negotiating the fault-line between private prac-tice and in-house employment can be tricky, as thescope for conflicts of interests is greatly increased.Insights into successfully managing the in-houselegal function discusses these and other issues.
Software Contract Agreements
Bond, Robert £80
ISBN: 978-185418146-6
Fully up-to-date with all changes to the law, thisreport is a thorough explanation of the law com-bined with expert guidance on negotiating anddrafting the best contract for your client.
Achieving Business Excellence, Qualityand Performance Improvement
Chapman, Colin & Hopper, Dennis £95
ISBN: 978-185418018-6
This valuable report identifies all the areas criticalto developing an effective performance improve-ment process. It is a practical guide to the use ofbusiness excellence models and frameworks,quality standards, benchmarking tools, self-assess-ment programmes and the latest performanceimprovement initiatives.
The Commercial Exploitation ofIntellectual Property Rights by Licensing
DesForges, Charles £95
ISBN: 978-185418285-2
This report will show you – whether as licensoror licensee – how to identify and secure profitableopportunities, strategies and techniques for negoti-ating the best agreement, and finally the techniquesof successfully managing a license operation.
Please see order form at the back of this reportHOW TO ORDER
Email: [email protected]
Telephone: +44 (0)1235 465 500
Fax: +44 (0)1235 465 556
Post: Marston Book Services, PO Box 269Abingdon, Oxon OX14 4YN
Web: www.thorogoodpublishing.co.uk
Understanding SMART Procurement inthe MOD
Boyce, Tim £69
ISBN: 978-185418164-0
The main thrust of this report is on issues to dowith strategy, organisation and processes. Thesingle most encouraging and exciting feature ofthe SMART procurement initiative is that itembraces the need to change the culture. Thereis a commitment within the high political echelonof the MoD to make this change happen. Probablythe greatest single challenge is to ensure that thiscommitment is maintained through the inevitablechanges of personality at the political and seniormanagement level.
IT Governance
Norfolk, David £169
ISBN: 978-185418371-2
This specially commissioned report sets out whatthe latest legislation says and what it means, itsimpact on the organisation as a whole and on theIT group specifically, and how to implement aneffective IT governance initiative in your company.
Practical Techniques for Effective Project Investment Appraisal
Tiffin, Ralph £99
ISBN: 978-185418099-5
How to ensure you have a reliable system in place.Spending money on projects automatically neces-sitates an effective appraisal system – a way ofdeciding whether the correct decisions on invest-ment have been made.
Project Risk Management: The commercial dimension
Boyce, Tim £95
ISBN: 978-185418257-9
This report will show you how to fully appreciateall the commercial dimensions of important proj-ects and understand how to identify all the risksduring the pre-contract bidding phase.
A Practical Guide to KnowledgeManagement
Brelade, Sue & Harman, Chris £99
ISBN: 978-185418230-2
An expert but jargon-free guide to enable you tomanage the knowledge in your organisationsuccessfully and to identify, gather and use thatknowledge to maximum advantage.
Analyse your Business – A performancehealth check
O’Connor, Carol £89
ISBN: 978-185418170-1
This briefing offers the tools and techniques forcompany-wide analysis and is essential readingfor business leaders responsible for corporate per-formance. Its purpose is to put minor issues intoperspective and discourage the use of quick fixsolutions for bigger problems.
Tendering & Negotiating MoD Contracts
Boyce, Tim £95
ISBN: 978-185418276-0
This report aims to draw out the main principles,processes and procedures involved in tenderingand negotiating MoD contracts. As Tim Boycewrites in the Introduction, ‘it is important to realisethat the SPI embraces a conceptual shift in the roleof the MoD procurers’.
What does this ‘huge shift in thinking’ mean forcontractors? How exactly has the role of MoDpurchasing changed? This report covers everyaspect of competitive tendering, negotiation andcontractual negotiations in this new era. There canbe few people who combine Tim Boyce’s experi-ence and expertise with a gift for explaining issuesand procedures with such clarity.
For full details of any title, and to viewsample extracts, please visit:
www.thorogoodpublishing.co.uk
BUSINESS STRATEGY AND MANAGEMENT
Surviving a Corporate Crisis: 100 things you need to know
Batchelor, Paul £80
ISBN: 978-185418208-1
Seven out of ten organisations that experiencea corporate crisis go out of business within 18months. This report not only covers remedialaction after the event but offers expert advice onpreparing every department and every key playerof the organisation so that, should a crisis occur,damage of every kind is limited as far as possible.
Technical Aspects of Business Leases:Overcoming the practical difficulties
Dowden, Malcolm £95
ISBN: 978-185418194-7
The purpose of this report is to highlight areaswhere technical issues might lead to practical dif-ficulties, and to give clear guidance to help thoseinvolved in property management avoid the pitfalls.
Strategy Implementation ThroughProject Management
Grundy, Tony £99
ISBN: 978-185418250-0
The gap: Far too few managers know how to applyproject management techniques to their strate-gic planning. The result is often strategy that ispoorly thought out and executed.
The answer: Strategic project management is anew and powerful process designed to managecomplex projects by combining traditional busi-ness analysis with project management techniques.
FINANCE
Tax Planning for Businesses and their Owners
Hughes, Peter £95
ISBN: 978-185418334-7
Written for business owners and managers, thisspecial briefing offers expert advice on the taximplications of your business decisions – guidingyou in making the right business and personalchoices for tax reduction.
Trade Secrets of Business Disposals
Pearson, Barrie £145
ISBN: 978-185418321-7
If you’re like most people, you’ll only get onechance to sell your business and to capitalise onyears of hard work and planning. You can eitherfluff it, or make sure you get the best possible advi-sor and become financially secure for life, andpossibly very rich. This report shows you how tomake your business ‘investor-ready’ for maximumcapital return.
Trade Secrets of Successfully AcquiringUnquoted Companies
Pearson, Barrie £145
ISBN: 978-185418366-8
In this invaluable new briefing one of the City’s mostsuccessful deal-makers distils 40 years’ experienceas both principal and advisor. “Losing a deal byadopting the wrong tactics is unforgiveable” hewrites, but it happens all too often. This briefing offersboth professional advisors and principals the oppor-tunity to transform their rate of success, clarifyinghard truths and highlighting avoidable mistakes. Itis laced throughout with proven tactical advice toensure that both deals and post-acquisition manage-ment are carried out with maximum success.
VAT Liability and the Implications ofCommercial Property Transactions
Buss, Tim £149
ISBN: 978-185418307-1
The option to tax is a major VAT planning tool butyou have got to get the detail right to take fulladvantage – and getting it wrong can be verycostly. This report shows you how to plan for max-imum advantage and avoid costly mistakes.
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of receipt, we will refund the cost of thepublication, no questions asked.
Data Protection Law for Employers
Singleton, Susan £80
ISBN: 978-185418283-8
The four-part Code of Practice under the Data Pro-tection Act 1998 on employment and dataprotection places a further burden of responsibil-ity on employers and their advisers. The DataProtection Act also applies to manual data, not justcomputer data, and a tough enforcement policywas announced in October 2002.
Discrimination Law and Employment Issues
Martin, David £55
ISBN: 978-185418339-2
The Age Discrimination Act is billed by lawyersas the most significant change in employment lawsince the 1970’s. In addition to sex and race dis-crimination laws, in the last two years employershave also had to cope with sexual orientation dis-crimination and religious discrimination. DavidMartin, an expert on employment law and prac-tice, analyses the practical aspects of dealingwith each of the anti-discrimination laws. Hedemonstrates how to ensure that paperwork andsystems comply totally with the law, and he pro-vides a range of helpful case studies to illustratethe key issues and bring them to life.
Effective Recruitment: A practical guideto staying within the law
Leighton, Patricia & Proctor, Giles £85
ISBN: 978-185418303-3
The ways to undertake the task continue to grow,making the decision as to how best to recruit fora given employment situation more complex.This specialist text is responding to a number ofimperatives, including legal ones. There havebeen, and are, anticipated changes that make itessential that recruitment practitioners act botheffectively and within the law.
Employee Sickness and Fitness for Work: Successfully dealing with the legal system
Howard, Gillian £95
ISBN: 978-185418281-4
Many executives see employment law as an obsta-cle course or, even worse, an opponent – but it cancontribute positively to keeping employees fit andproductive. This report will show you how to getthe best out of your employees, from recruitmentto retirement, while protecting yourself and yourfirm to the full.
Employment Law Aspects of Mergersand Acquisitions: A practical guide
Ryley, Michael £95
ISBN: 978-185418363-7
This Report will help you to understand the keypractical and legal issues, achieve consensus andinvolvement at all levels, understand and implementTUPE regulations and identify the documentationthat needs to be drafted or reviewed within the con-text of a merger, acquisition or disposal.
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of receipt, we will refund the cost of thepublication, no questions asked.
For full details of any title, and to viewsample extracts, please visit:
www.thorogoodpublishing.co.uk
EMPLOYMENT LAW
Need it now? Download a PDF of the reportat: www.thorogoodpublishing.co.uk
Navigating Health and Safety Law:Ensuring compliance and minimising risk
Pope, Chris £95
ISBN: 978-185418353-8
If you have already been challenged by the insurer,inspector, or one of your workforce about the sta-tus of your health and safety this report will giveyou a workable answer to questions like Is my healthand safety policy legally compliant? How do I avoidbeing liable for an employees ill health arising fromprevious employment? Who should carry outsafety inspections – is it my responsibility?
Successfully Defending EmploymentTribunal Cases
Hunt, Dennis £95
ISBN: 978-185418267-8
Sweeping changes to the way employment tribu-nal claims are dealt with have increased the riskof higher costs and more expensive claims. Thisindispensable report covers all the changes andtheir implications for HR professionals.
Please see order form at the back of this reportHOW TO ORDER
Email: [email protected]
Telephone: +44 (0)1235 465 500
Fax: +44 (0)1235 465 556
Post: Marston Book Services, PO Box 269Abingdon, Oxon OX14 4YN
Web: www.thorogoodpublishing.co.uk
HR, RECRUITMENT AND TRAINING
Applying the Employment Act 2002:Crucial developments for employers and employees
Williams, Audrey £95
ISBN: 978-185418253-1
The Act represents a major shift in the commer-cial environment, with far-reaching changes foremployers and employees. The consequences ofgetting it wrong, for both employer and employee,will be considerable – financial and otherwise. TheAct affects nearly every aspect of the workplace.
Dismissal and Grievance Procedures
Hunt, Dennis £95
ISBN: 978-185418376-7
This report explains what all the regulations sayand what steps you need to take to operate effec-tive dismissal, disciplinary and grievanceprocedures. It covers all the requirements of theDisputes Resolution Procedures that came intoeffect in October 2004. It tells you where and whenthe regulations apply – and what you need to do.
Enabling Beyond Empowerment
Williams, Michael £95
ISBN: 978-185418084-1
By applying the range of practical managementtechniques detailed in this report, you can providethe authority and means to empower in a way thatsubstantially reduces the dangers.
Flexible Working
Williams, Audrey £95
ISBN: 978-185418306-4
Recent research shows that far too many individ-uals, as well as firms, are unaware of flexibleworking rights. How employers and employeesdeal with them is of crucial – and increasing –importance to both. This report clarifies the law,sets out the rights of employer and employee, andoffers valuable practical advice on best practice.
For full details of any title, and to viewsample extracts, please visit:
www.thorogoodpublishing.co.uk
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of receipt, we will refund the cost of thepublication, no questions asked.
For full details of any title, and to viewsample extracts, please visit:
www.thorogoodpublishing.co.uk
How to Turn your HR Strategy into Reality
Grundy, Tony £85
ISBN: 978-185418183-1
From a diagnosis of HR issues to an analysis ofthe external and internal future environment ofyour company and the effect on your humanresources – this is practical information aimed atHR and senior line managers.
Internal Communications
Farrant, James £95
ISBN: 978-185418149-7
There is growing evidence that the organisationsthat ‘get it right’ reap dividends in corporateenergy and enhanced performance. In theseorganisations, internal communications have equalstatus with the external communications functions.This practical report will show you how internalcommunications, taken in their widest sense, canimprove the performance of organisations.
Mergers and Acquisitions: Confrontingthe organisation and people issues
Thomas, Mark £95
ISBN: 978-185418008-7
Why do so many mergers and acquisitions end intears and reduced shareholder value? This reportwill help you to understand the key practical andlegal issues, achieve consensus and involvementat all levels, understand and implement TUPE reg-ulations and identify the documentation that needsto be drafted or reviewed.
New Ways of Working
Jupp, Stephen £99
ISBN: 978-185418169-5
New ways of working examines the nature of thework done in an organisation and seeks to opti-mise the working practices and the whole contextin which the work takes place. It is more aboutpromoting the best ways of doing things than sim-ple cost driven change. Although it emphasisesthe importance of business and organisation, itspans the concerns of people, property, technol-ogy, community and environment.
Power Over Stress at Work
Araoz, Daniel £99
ISBN: 978-185418176-3
The HR manager can learn how to deal creativelywith stress from the information in this briefingand pass on their knowledge down the ranks. Heor she will then halt the downward spiral of dif-fusing stress and produce a more positive knock-oneffect – namely to increase the productivity of theentire workforce and reduce absenteeism result-ing from this terrible illness.
Reviewing and Changing Contracts of Employment
Phillips, Annelise; Player, Tom & Rome, Paula £95
ISBN: 978-185418296-8
The Employment Act 2002 has raised the stakes.Imperfect understanding of the law and poor draft-ing will now be very costly. This report will:
• Ensure that you have a total grip on what shouldbe in a contract and what should not
• Explain step by step how to achieve changesin the contract of employment without causingproblems
• Enable you to protect clients’ sensitive businessinformation
• Enhance your understanding of potentialconflict areas and your ability to managedisputes effectively.
Trade Secrets of Using e-Learning in Training
Bray, Tony £95
ISBN: 978-185418326-2
Definitely not for ‘techies’, this report is practicaland jargon-free – giving you step-by-step skills andprocesses to enable you to design effective e-learn-ing products with confidence.
Transforming HR
Hunter, Ian and Saunders, Jane £95
ISBN: 978-185418361-3
The blue-print for the future of HR – how to deliverproven value to your Board, business and col-leagues. The report is based on interviews with 60HR leaders from across industry and public andnot for profit sectors. The report covers HR out-sourcing and shared services.
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cost of the publication, no questions asked.
MARKETING, PR AND SALES
Insights into Understanding theFinancial Media: An insider’s view
Scott, Simon £99
ISBN: 978-185418083-4
This briefing will help you understand the way thefinancial print and broadcast media works in theUK. It will also provide you with techniques andguidelines on how to communicate with the finan-cial media in the most effective way, to help youachieve accurate and positive coverage of yourorganisation and its operations.
Lobbying and the Media: Working withpoliticians and journalists
Burrell, Michael £99
ISBN: 978-185418240-1
Lobbying is an art form rather than a science, sothere is inevitably an element of judgement in whatline to take. The best lobbying is always based onaccurate, up-to-date information and on a well-argued case, founded on credible evidence, anddelivered to the right audiences in the right toneof voice at the right time. Sounds simple, but it isn’t.This expert report explains the knowledge andtechniques required.
Corporate Community Investment
Genasi, Chris £99
ISBN: 978-185418192-3
Supporting good causes is big business – and goodbusiness. Corporate community investment (CCI)is the general term for companies’ support of goodcauses, and is a very fast growing area of PR andmarketing.
Defending your Reputation
Taylor, Simon £99
ISBN: 978-185418251-7
‘Buildings can be rebuilt, IT systems replaced, peo-ple can be recruited, but a reputation lost can neverbe regained…The media will publish a story – youmay as well ensure it is your story’ Simon Taylor.‘News is whatever someone, somewhere, does notwant published’ William Randolph Hearst Whena major crisis does suddenly break, how ready willyou be to defend your reputation?
Implementing an Integrated MarketingCommunications Strategy
Hart, Norman £99
ISBN: 978-185418120-6
Get ahead and stay ahead of your competitionthrough better integration of your marketing com-munications. Norman Hart was an internationalconsultant, lecturer and author on marketing,advertising and public relations. His booksincluded The CIM Marketing Dictionary, Strate-gic Public Relations, The Practice of Advertisingand Industrial Marketing Communications.
Managing Corporate Reputation: The new currency
Dalton, John & Croft, Susan £95
ISBN: 978-185418272-2
ENRON, WORLDCOM… who next? At a timewhen trust in corporations has plummeted to newdepths, knowing how to manage corporate rep-utation professionally and effectively has neverbeen more crucial. This report shows you how to:
• Develop PR, brands and relationship manage-ment as the vanguards of your corporatereputation
• Strengthen your internal as well as externalcommunications
• Improve the effective management of yourstakeholders
Practical Techniques for Effective Lobbying
Miller, Charles £95
ISBN: 978-185418089-6
Understanding the system and the process inwhich it works is essential to lobbying effectively.Uncoordinated, uncontrolled and badly plannedapproaches will do more harm than good, and riskantagonising the people you most want to influ-ence. This report provides the techniques requiredfor effective lobbying.
Public Affairs Techniques for Business
Wynne-Davies, Peter £95
ISBN: 978-185418175-6
This report shows in practical terms how you cancounter potential threats through a professionallystructured and implemented public affairs cam-paign. Today’s successful companies recognise thatin order to survive and prosper a comprehensiveand disciplined approach to public affairs is nolonger just a useful asset, it is now a necessity.
Selling Skills for Professionals
Tasso, Kim £99
ISBN: 978-185418179-4
Many professionals still feel awkward about reallyselling their professional services. They are not usu-ally trained in selling. This is a much-needed reportwhich addresses the unique concerns of profes-sionals who wish to sell their services successfullyand to feel comfortable doing so.
Strategic Customer Planning
Melkman, Alan & Simmonds, Ken £95
ISBN: 978-185418388-0
This is very much a ‘how to’ report. After read-ing those parts that are relevant to your business,you will be able to compile a powerful customerplan that will work within your particular organ-isation for you. Charts, checklists and diagramsthroughout.
Strategic Planning in Public Relations
Knights, Kieran £99
ISBN: 978-185418225-8
Tips and techniques to aid you in a new approachto campaign planning. Strategic planning is a freshapproach to PR. An approach that is fact-basedand scientific, clearly presenting the arguments fora campaign proposal backed with evidence. Thisreport provides valuable tips and techniques toimprove your PR and campaign planning.
Successful Competitive Tendering
Woodhams, Jeff £95
ISBN: 978-185418235-7
To win business, you must make a convincing case.This report will help you become more skillful, andmore successful in your tendering.
Techniques for Ensuring PR Coveragein the Regional Media: An insider’s view
Imeson, Mike £99
ISBN: 978-185418019-3
This in-depth briefing will give you the tools andtechniques you need to enjoy the opportunitiesoffered by the regional and local media. It offersyou practical guidance and advice on how toapply them with maximum effect for your nextPR campaign.
For full details of any title, and to viewsample extracts, please visit:
www.thorogoodpublishing.co.uk
Title ISBN Price Authors Qty
Commercial Contracts: Drafting techniques and precedents 978-185418271-5 £169 Ribeiro, Robert
Commercial Litigation: Damages and other remedies for breach of contract 978-185418397-2 £169 Ribeiro, Robert
Corporate Governance 978-185418354-5 £85 Martin, David
Email: Legal issues 978-185418256-0 £80 Singleton, Susan
Freedom of Information Act 978-185418347-7 £95 Singleton, Susan
International Commercial Agreements 978-185418286-9 £95 Attree, Rebecca
Insights into Successfully Managing the 978-185418174-9 £95 O’Meara, BarryIn-house Legal Function
Software Contract Agreements 978-185418146-6 £80 Bond, Robert
Achieving Business Excellence, Quality and 978-185418018-6 £95 Chapman, ColinPerformance Improvement & Hopper, Dennis
The Commercial Exploitation of Intellectual 978-185418285-2 £95 DesForges, Property Rights by Licensing Charles
Intellectual Property Protection and Enforcement 978-185418054-4 £159 Brazell, Lorna
Waste Management: The changing legislative climate 978-185418367-5 £80 Hand, Caroline
Websites and the Law 978-185418331-6 £80 Singleton, Susan
A Practical Guide to Knowledge Management 978-185418230-2 £99 Brelade, Sue & Harman, Chris
Analyse your Business – A performance health check 978-185418170-1 £89 O’Connor, Carol
Tendering & Negotiating MoD Contracts 978-185418276-0 £95 Boyce, Tim
Understanding SMART Procurement in the MOD 978-185418164-0 £69 Boyce, Tim
IT Governance 978-185418371-2 £169 Norfolk, David
Practical Techniques for Effective Project 978-185418099-5 £99 Tiffin, Ralph Investment Appraisal
Project Risk Management: The commercial dimension 978-185418257-9 £95 Boyce, Tim
Strategy Implementation Through Project Management 978-185418250-0 £99 Grundy, Tony
Surviving a Corporate Crisis: 100 things you need to know 978-185418208-1 £80 Batchelor, Paul
Technical Aspects of Business Leases: 978-185418194-7 £95 Dowden, Overcoming the practical difficulties Malcolm
Tax Planning for Businesses and their Owners 978-185418334-7 £95 Hughes, Peter
Trade Secrets of Business Disposals 978-185418321-7 £145 Pearson, Barrie
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Title ISBN Price Authors Qty
Trade Secrets of Successfully Acquiring 978-185418366-8 £145 Pearson, BarrieUnquoted Companies
VAT Liability and the Implications of 978-185418307-1 £149 Buss, TimCommercial Property Transactions
Data Protection Law for Employers 978-185418283-8 £80 Singleton, Susan
Discrimination Law and Employment Issues 978-185418339-2 £55 Martin, David
Effective Recruitment: 978-185418303-3 £85 Leighton, PatriciaA practical guide to staying within the law & Proctor, Giles
Employee Sickness and Fitness for Work: 978-185418281-4 £95 Howard, GillianSuccessfully dealing with the legal system
Employment Law Aspects of Mergers and Acquisitions: 978-185418363-7 £95 Ryley, MichaelA practical guide
Navigating Health and Safety Law: 978-185418353-8 £95 Pope, ChrisEnsuring compliance and minimising risk
Successfully Defending Employment Tribunal Cases 978-185418267-8 £95 Hunt, Dennis
Applying the Employment Act 2002: 978-185418253-1 £95 Williams, AudreyCrucial developments for employers and employees
Dismissal and Grievance Procedures 978-185418376-7 £95 Hunt, Dennis
Enabling Beyond Empowerment 978-185418084-1 £95 Williams, Michael
Flexible Working 978-185418306-4 £95 Williams, Audrey
How to Turn your HR Strategy into Reality 978-185418183-1 £85 Grundy, Tony
Internal Communications 978-185418149-7 £95 Farrant, James
Mergers and Acquisitions: Confronting the organisation 978-185418008-7 £95 Thomas, Markand people issues
New Ways of Working 978-185418169-5 £99 Jupp, Stephen
Power Over Stress at Work 978-185418176-3 £99 Araoz, Daniel
Reviewing and Changing Contracts of Employment 978-185418296-8 £95 Phillips, Annelise; Player, Tom & Rome, Paula
Trade Secrets of Using e-Learning in Training 978-185418326-2 £95 Bray, Tony
Transforming HR 978-185418361-3 £95 Hunter, Ian and Saunders, Jane
Corporate Community Investment 978-185418192-3 £99 Genasi, Chris
Defending your Reputation 978-185418251-7 £99 Taylor, Simon
Implementing an Integrated Marketing 978-185418120-6 £99 Hart, NormanCommunications Strategy
Insights into Understanding the Financial Media: 978-185418083-4 £99 Scott, SimonAn insider’s view
Lobbying and the Media: Working with politicians 978-185418240-1 £99 Burrell, Michaeland journalists
Managing Corporate Reputation: The new currency 978-185418272-2 £95 Dalton, John & Croft, Susan
For full details of any title, and to viewsample extracts, please visit:
www.thorogoodpublishing.co.uk
Title ISBN Price Authors Qty
Practical Techniques for Effective Lobbying 978-185418089-6 £95 Miller, Charles
Public Affairs Techniques for Business 978-185418175-6 £95 Wynne-Davies, Peter
Selling Skills for Professionals 978-185418179-4 £99 Tasso, Kim
Strategic Customer Planning 978-185418388-0 £95 Melkman, Alan & Simmonds, Ken
Strategic Planning in Public Relations 978-185418225-8 £99 Knights, Kieran
Successful Competitive Tendering 978-185418235-7 £95 Woodhams, Jeff
Techniques for Ensuring PR Coverage in 978-185418019-3 £99 Imeson, Mikethe Regional Media: An insider’s view
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