Acquisitions and business development
The procedure of a company to acquire another of the same industry or of an industry in which it would like to expand its business, is connected to its growth.
In procedural terms this is one of the agreements “concluded” between those who have the authority to do so: The, normally, strong party (that is, the acquiring party) and the, normally, weak one (that is, the party to be acquired).
In any case, the “acquiring company” aims to its further (direct) development, utilizing the structures, the staff, the activity and the customer base of the acquired company.
The risks of an acquisition
The acquisition of a company, however attractive it may be, poses significant risks to the acquiring party, buyer. What are these risks? Legal, economic, tax risks and so on.
These exact risks the person who is interested in acquiring must explore and consider and the assess whether to proceed to the next steps.
At this point, specific consultants are, perforce, involved in order to carry out the necessary legal, financial, tax, technical audits (or, as per the international terminology: legal, financial, tax, technical due diligence).
And it is true that we have all heard of acquisitions where the entrepreneurs simply “shook hands on the deal” in the view that “everything is ok” or that they would not face serious or just unmanageable problems. Such a choice certainly could not be classified as wise as no one would want to find himself in difficult (or unmanageable) situations: If the new owner, for example, subsequently found out that a third party has initiated actions for significant amount of money against the acquired company or that there are legal actions challenging the ownership of the shares that have been transferred or that a tax audit has never been carried out in that company or that the lease of the main premises expired only a month ago …
No one, I’m sure, would want to find himself in such situations. No one would want to risk his financial position because he did not carry out audits or because the audits conducted were proved defective.
The various audits explore certain areas of the company’s life and activity and are intended to reduce the business risk of the acquiring party. Indicatively:
Legal audit: There are analyzed (indicatively) the data concerning the company itself, its holdings, its assets (movable, immovable, intangible), its labor relations, its legal cases, its relations with the authorities (fulfillment of its obligations linked to its activity),
Financial Audit: The company’s financial statements are audited, and the correctness of their representation is verified, the accounting books and data are checked, the potential “gray” areas are searched (and clarified), the existence (or non-existence) of financial problems is confirmed. (Or, in another, most modern version of EY Canada: “The diligence exercise probes deeply into the quality and sustainability of earnings by examining underlying risks and exploring previous financial performance to determine whether it can reasonably be expected to continue, and to understand how changing circumstances and trends may impact the future of the business”)
Tax Audit: There is an audit on tax liabilities and corresponding outstanding issues of the company
Technical Audit: All issues of technical nature related to the operation of the company are checked; it is differentiated according to its subject.
The acquisition contract
Upon the completion of the above audits, is the maximum possible assurance for the acquiring party achieved? Apparently not as the “gentlemen’s agreement” should be followed by the relevant contract, which will contain the important parameters of this agreement. Indicatively:
(a) The price and method of payment (provided, of course, that there has been the company’s value assessment)
(b) Any supplemental agreements relating to parameters for increasing, under condition, the price and / or other earnings,
(c) Shareholders’ individual rights (when the transferor remains with a minority stake in the acquired company, e.g. tag and drag along rights, management issues, a shareholder agreement beyond the company’s Statute),
(d) The obligations undertaken by the acquiring party in relation to the transferor (e.g. exemption from bank guarantees, removal of any charges/mortgage prenotations in personal property),
(e) The assurances and warranties provided by the acquired party, with regard to the data and the information provided,
(f) Penalties in the event of ex-post liabilities occurring prior to the transfer, and so on.
It is obviously NOT enough just to shake hands on!
The acquisition of a company is undoubtedly an important stop for the company itself, for the transferor and, of course, for the acquiring party. The risk that the latter assumes should be reasonable and measurable. And its safeguards should be the best possible.
Υ.Γ. A brief, Greek version of this article has been published in MAKEDONIA newspaper (December 2, 2018)