Protecting the value of your newly-acquired businesses can be a challenge
Buying a business is exhilarating. Hard work, to be sure - but undeniably exciting, and with a rich sense of the opportunities that lie ahead.
So perhaps understandably, once the deal has closed, there’s a temptation to get stuck in and focus on actually running the business, rather than thinking about protecting - and adding to - the value that you have acquired.
Which could be a mistake - and an expensive mistake, at that. Because inevitably, a lot of that value is enshrined in key contracts, key customer relationships, key employees, and key pieces of intellectual property.
And while you are focusing on the practicalities of running the newly-acquired business, significant damage can be caused to that value.
What can go wrong?
At its root, the problem is there is a distinction between recognising a potential problem during the pre-acquisition due diligence process, and subsequently taking steps to avoid that problem when in actual ownership of the business.
In essence, the responsibility for initially recognising the potential problems lies with you and your advisors. But once the purchase is completed, the responsibility for avoiding those problems is down to you alone - and the reality is that you will have many other things to think about.
Yet the potential problems remain. Key customers - and employees - may become disaffected, and walk away. Critical dates for providing notifications, or taking actions, may be missed. Legal and business obligations may be missed. Changed working practices - and commercial practices - may give rise to strained relationships. And so on, and so on.
On their own, none of these issues may be significant enough to jeopardise the success of the newly-acquired venture.
But, in combination with others, they may amount to significant value being lost, and significant amounts of management time must then be devoted to attempting to turn things around.
In such circumstances, it is especially galling for the business’s new owners to realise that they knew about such problems all along - but still fell into the trap!
Five things to consider
Individual circumstances differ. No two businesses, of course, are the same.
But in our experience, paying attention to a few key areas is usually worthwhile: in short, when problems arise, it is these areas that are often impacted.
- Do contracts contain any ‘change of control’ provisions? There may be a requirement to inform contractual counterparties and other third parties that there has been a change of control of the business that you have acquired
- Do you have physical copies of the key contracts that are applicable to the business - especially customer - and supplier-related ones? Are there any significant dates or requirements to be fulfilled, or any unusual terms and conditions? If so, can you adhere to them? More generally, are the acquired business’s standard terms and conditions in line with your own terms and conditions?
- Do the warranties that the seller provided you with at completion properly reflect the state of the business as you found it? Are there critical dates for reporting or taking action on any discrepancies - and have those dates been noted and diarised?
- Might differences between the employment contracts, benefits, and culture of the acquired business and your own existing business pose any difficulties? How - or should - those employment contracts, benefits, and culture be aligned?
- Have you noted and diarised all the important dates applicable to the newly-acquired business? Who within the organization is going to be accountable for ensuring that these are complied with? Key dates could include cessation of the warranty period under the Share Purchase Agreement, payment of deferred consideration (if any), retention payments, and the business’s financial year end and reporting dates.
What to do?
Are you buying a business? Have you recently bought a business? Did your legal advisors’ due diligence process highlight any areas of concern?
What is important is operationalising and prioritising those warnings, and making sure that problems are dealt with before damage is done, or opportunities missed.
It’s also worth noting that a legal audit or due diligence ‘health-check’ can be carried out at any time, and not just in the context of an acquisition, and can flag many of the same potential problems.
Here at The Legal Director, we can help your business to navigate these issues. To find out how, please call us on 020 3053 8613 or email email@example.com
Posted Sunday, October 1st, 2017 by Warren RylandTweet
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