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Acquisitions - How to make a return…(part 3)

In my recent posts, I have been talking about how an acquirer can maximise their return on investment by avoiding the standard pitfalls in a deal. I have mentioned the experiences of Mercer & Hole in making acquisitions, and how we have ultimately succeeded by aiming at niche businesses, realistic negotiating and by integrating into the existing M&H ethos. 

We had reached the point in our hypothetical deal where the seller had provided enough information to make an offer.

It is important to invest significant time in the offer itself. The key issue is obviously the valuation - there are a number of ways to approach this - profit multiples, discounted cash flows etc (far too much for this blog). 

It is almost as important to ensure the other terms are in your favour - earn out agreements, working capital levels, vendor service agreements and warranties. A crucial issue I come across time and time again are the conditions attached to the offer - if sufficient conditions are not included with the offer, it may hinder price negotiations after due diligence. It is not easy to predict what the diligence will identify, but with a bit of thought the key risks can be covered.

Most sellers will attempt to renegotiate the terms of the offer - most good business people should be well used to bartering / haggling at this point. In the words of the father of modern economics:

"The propensity to truck, barter and exchange one thing for another is common to all men, and to be found in no other race of animals."

Adam Smith (Scottish philosopher and economist)

I will cover the final stages shortly.

 

 

Date: 29th January, 2009
Author: Julian Dobbin

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