Where Angels Fear to Tread - Jo Haigh

With interest rates remaining at an historic low with no imminent chance of a rise on the horizon, if you are fortunate enough to be sitting on excess cash, then there are undoubtedly some fabulous opportunities to acquire a business bargain.

Whilst the economy appears to be rallying we clearly have a very long way to go until we could even contemplate stability.

The fact remains, vendors still exist, for whatever reason business sales still need to happen, creating in an economy which is very short on debt availability, a buyers market.

By implication, therefore, there will be some bargains to pick up for the astute, cash rich acquirer. That said perhaps it’s more important than ever to not ignore the old Latin tag of caveat emptor (let the buyer beware) and, just because something is cheap, by no means suggests it’s a good buy. The same rigorous due diligence, particularly on business potential in this economy, which sees more businesses declining than ever before, should be undertaken.

Having said that ROI levels do not need to be anywhere near where they were even two years ago, never mind five but they are not going to remain so modest indefinitely. Granted, your crystal ball may need an extra polish but never the less market data on market and product growth and decline, probably needs to look a little further into the future than previous acquisition strategies have looked.

Deal fever exists in the best of times and more so in an economic decline when horizons can be false, based on over optimistic views of potential on what appears to be a bargain basement price.

A cost effective price naturally gives you more leeway but it’s still a cost and skeletons are coming out of cupboards in so many companies that, in strong economic periods, would have remained firmly buried.

An experienced buyer will have a detailed due diligence check list, if you are a first time acquirer, unless your acquisition is very, very modest, get professional help. As well as all the usual areas, the following need special review;

As the future is so uncertain a savvy acquirer, even one with excess cash, should seriously negotiate deferred consideration wherever possible based on future performance. Vendors don't, of course, warm quickly to this option but that doesn’t mean they won’t accept it.

If you are buying a basket case or a fire sale business, stick to buying assets rather than shares as this minimises risk and speeds up the process. Of course you may not have the choice and, if it’s a share deal or no deal, relying on the comfort of warranties and indemnities needs to be done in the context that they are ultimately only as good as a funding available on the back of a successful litigation (i.e. more cost) !

So ‘cash rich acquirers’ are you ready to don your angel wings? I’d say yes but !

Take off the rose coloured glasses and spread risk –

in other words don't put it all on Red!

Jo Haigh
Head of Corporate Finance for MGR
www.mgr.co.uk
jo.haigh@mgr.co.uk
0844 826 2851 / 0207 644 9674
http://www.linkedin.com/in/johaigh