We have helped many clients acquire businesses. Acquiring a business is a process of due diligence. Due diligence is a process of establishing that a fair value is being paid for the business. Some examples of things to consider are :
- Adjustments needed to the reported results
- Best structure for the acquired business
- Contingent consideration and contingent plans
There are numerous reasons why “adjustments” need to be made to the reported results of a business to obtain the base upon which the value is calculated eg proprietor and family wages and non operating costs such as interest.
Part of the process is to organise the best structure for the acquired business which ensures protection of assets and taking full advantage of available tax concessions.
Increasingly, the purchase of businesses is based on “contingent” consideration. This means that the acquirer pays a substantial portion of the consideration based on how well the business performs for a period (say three years) after the business changes hands. Invariably, this arrangement involves the previous owner remaining in the business for the same period as an employee, consultant or contractor.
This means of buying a business has significant advantages, particularly in sectors which are regarded as higher risk acquisitions or there are doubts as to the future of the sector e.g. possible future government legislation or changes in technology.
However, there can be confusion over how the consideration is calculated on future results and we concentrate on methods of to eliminate this confusion. There may also be a need for a contingent plan eg if the new owners cannot easily work with the old owners.
If you are considering purchasing a business – we can help you.