Mergers and acquisitions
The problem
Every ambitious business sees merger or acquisition as one route to growth, and the hospitality sector is not exempt from this. It's a tempting prospect in a situation where a competitor faces problems such as losses, falling sales and an unsympathetic bank manager, and the business can be bought for only part of its real value; or when two rivals see faster growth by joining forces.
The problem to be avoided at all costs arises from the fact that fewer than 50% of mergers and acquisitions achieve the level of success anticipated. Key managers leave within two or three years and the workforce often becomes disheartened.
The law
The purchaser needs to be fully aware of the seller's warranties and indemnities - for example, net assets as well as tax liabilities. Due diligence requires that audited accounts and current accounts are satisfactory, the customer list is genuine, and the order book is a true record of business in hand. It also has to cover transfer of employment rights and employee protection.
Expert advice
Good accountants and lawyers experienced in handling "company marriages" are critical to conducting due diligence investigations into the legal and financial health of your merger or acquisition target and to verify strategic aims you've already checked out, such as management, services and customer base.
All these factors will help to determine the value of the business, but be prepared for considerable haggling. Take advice and take your time over negotiations.
The key test, once you've found a potential merger partner, is a good strategic fit - can you work together, and will the enlarged business produce higher earnings? The most successful deals are those where both parties have known each other for a long time and are fully aware of each other's strengths and weaknesses.
Many mergers and acquisitions are defensive - a result of contracting markets, excess capacity, and rising sales and research costs. Another reason to make doubly sure that the strategic fit is right is that the rationalisation which may have to follow can be handled without creating too much shock and anger.
Smaller deals, especially management buyouts, where the purchaser knows the business and its value, are not always hassle-free, but in many cases proceed smoothly, given sound professional advice.
In the case of acquisitions, few venture-capital houses are willing to consider investments of less than £2m-£3m and some will not consider investments of less than £20m.
Professional advisers make the point that well-prepared and well-structured deals can still be made but, before approaching venture capital or business "angel" funds, plans should be carefully prepared and reviewed by financial advisers. These funds receive hundreds of business plans and, unless they are well-presented, they are likely to be discarded.
The next critical phase starts once negotiations are finalised and the deal is done. The sellers can walk away. The purchasers now have to run the acquired or merged business, which can be harder than they realised.
Now is the time to ask: is your team really poised to drive the business forward? Are there aspects of the negotiations that you would have tackled differently?
Beware
\* Lax financial control can harm the business.
\* Good budgeting is vital.
\* Employee relations are key. Treat your staff like customers.
Check list
Ensure your professional advisers have experience of mergers and acquisitions.
Can you work with your new partners - is the chemistry right?
Is the business plan realistic?
The law is on the side of employees, but can you be sure that key employees will stay?
Make sure cash-flow forecasts are strictly adhered to.
Contacts
UK 200 Group 01252 333511
www.uk200group.co.uk
Tenon Livingstone Guarantee 020 7484 4700
www.tenon-lg.com
