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10 top tips for SME acquisitions

The credit crunch is having an affect on all asset prices, and this is bringing some first time buyers/investors into the private SME market. With this in mind, I thought I would ‘blog’ some tips for SME acquisitions.

Prior to an offer being made :

  1. Buy the trade / assets, and not the shares. With a company you inherit its problems and therefore potential liabilities. There are also tax advantages to buying the trade and assets. This is particularly important for ‘distressed’ acquisitions.
  2. When reviewing profits for valuation purposes watch out for shareholders / directors remuneration. If the costs of their input to the business are not in the P&L, the valuation will be inflated.
  3. Consider other missing costs. This is particularly relevant where a seller has more than one business - is rent correctly allocated? Which company does the accountant charge? etc
  4. Customers. Reliance on a smaller number of large customers is a risk. The health of the customer base in the current economic climate is crucial. Ask the seller for outline details of clients – their size, sector etc and review the level of their own personal contact with customers. Consider what protection should be added into the offer – such as an ‘earn out’ for the seller.
  5. In your offer be careful to clarify the assumptions you have made, and the conditions attached. This will make it easier to renegotiate the price should issues be identified during Due Diligence.

I will cover the 2nd set of five tips in my next post.

Please note that the tips differ, dependent on the nature of the acquisition. I have been very general here and there are many other risks which should be considered in making an acquisition decision.

 

 

Date: 13th March, 2009
Author: Julian Dobbin

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