18/03/2003 - 21:00

Information exchange vital for a successful transaction

18/03/2003 - 21:00


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In the second in a series on mergers and acquisitions, Mark Beyer looks at the type of information business owners need to provide potential buyers.

Information exchange vital for a successful transaction

In the second in a series on mergers and acquisitions, Mark Beyer looks at the type of information business owners need to provide potential buyers.

COMMON wisdom holds that retail businesses are bought on emotion, and owners then seek to justify their purchase with logic.

Conversely, large businesses are bought on logic, then the owners put their emotion into running the business.

These rules may not apply universally but they certainly provide a handy guide for business owners who are planning to sell their business.

Owners of small, retail businesses can quickly and easily spruce up their business to maximise the sale prospects.

Life is not so simple for owners of large businesses. There is a range of in-depth information they will need to provide to prospective buyers.

Ross Goldstein, principal of corporate broker Mergers & Acquisitions, said a critical first step was to understand the target market in order to anticipate the type of information needed by potential purchasers.

For instance, if the potential purchaser is a competitor, they should already have a detailed understanding of the industry and its growth prospects.

If the purchaser is an ASX-listed company, or they need bank funding to complete the transaction, they may need more detailed financial information than a self-funded private investor.

Brenton Siviour, director of advisory firm Business Symmetry, said business owners should try to plan two or three years ahead if they want to maximise their sale price.

“Buyers want bargains,” Mr Siviour said. “A lack of proper planning by an entrepreneur can throw just such a bargain into their laps.”

He said a good starting point for business owners was to update their business plan and put it into a format that was appropriate for use in the sale of their business.

Key features of a business plan normally include a SWOT analysis, with details of competitors and expansion opportunities, profiles of customers and key suppliers, including contractual agreements, a description of products and an analysis of sales by product.

Vendors will also need to provide historical financial accounts, including profit and loss statements and balance sheets. This will be more of an issue for private businesses that have not previously required audited financial statements.

Mr Siviour said vendors needed to take extreme care that financial statements were not misleading or likely to mislead, for instance as a result of omissions.

“There have been many cases where vendors have had to pay substantial damages because of statements made in the course of selling a business,” he said.

Mr Goldstein said the historical accounts should be for at least three years and possibly out to five years.

The vendor should also prepare cash flow forecasts and budgets for at least one year and preferably up to three years. This would include details of impending capital expenditure.

Mr Goldstein said buyers of a business were always looking for current or potential problems and it was better for the vendor to anticipate such problems.

For instance, if the historical earnings had been volatile, the vendor should explain why this occurred, he said. The volatility may be explained by one-off factors. If not, the vendor should explain what they have done to address the earnings volatility.

Similarly, the description of stock holdings and stock turnover should include details of slow moving or obsolete stock.

In addition, the analysis of debtors and creditors should include details of slow-paying debtors.

Details of current or impending litigation or disputes also should be provided.

A critical issue, especially in smaller organisations, is management succession. In many cases, the person who establishes a business continues to run the business until the day they plan to sell.

Good planning would involve promoting or bringing in new management who can continue to run the business after the owner-founder moves on.

While the value of a business is fundamentally determined by its historical earnings, there are a number of initiatives that current owners can take in the short term to improve the presentation of their business.

This can include tidying up the financial situation by writing off bad debts, collecting overdue accounts and paying accounts.

Loans and leases can be consolidated so that the debt situation does not appear too complex.

Establishing or renewing lines of credit can also help to make a business more attractive.

Mr Goldstein said a key task in sale negotiations was to manage the fine balance between making relevant information available to a potential purchaser and maintaining confidentiality.

“The process we find most appropriate is a gradient approach,” he said. “This starts with summary and overview information, and as confidence and interest grows, sensitive and confidential material can be made more accessible.

“A letter of intent indicating the price that a purchaser is willing to pay, together with confirmation that finance is available, will provide confidence in the ongoing supply of information.”

Mr Goldstein said the amount and type of information needed to close a deal varied substantially.

Some transactions had been completed on the basis of summary material in an ‘information memorandum’ while others required a full-blown discovery process over many weeks.

p Next week: Preparing for an acquisition.


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