Trade Secrets of Successfully Acquiring Unquoted Companies

TRADE SECRETS OF BUSINESSACQUISITIONS

Barrie Pearson

A Thorogood Special Briefing

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The author

Barrie Pearson is chief executive of Realization. The company provides world

class mentoring and coaching for chief executives and entrepreneurs about to

embark on the acquisition trail, and to help them groom a business as the first

step in making a disposal through until the consideration is paid to them.

After university, Barrie worked for Dexion Comino International, The Plessey

Company and The De La Rue Company, acquiring and managing companies

in the UK, mainland Europe and the USA.

In 1976, he founded Livingstone Guarantee plc, the first corporate finance

boutique in the UK, advising on acquisitions, disposals, management buy-outs

and buy-ins, fund-raising and stockmarket listings. When he sold it, the company

had become the largest and most successful independent corporate finance house

in the UK.

He has written seventeen books, in his spare time, including Trade Secrets of

Business Disposals which was published recently by Thorogood. He has presented

seminars on acquiring and selling companies in the UK, Europe, New Zealand

and the Far East.

He is Chairman of Precision Corporate Finance which is headed up by Neil

Ackroyd, a former colleague in Livingstone Guarantee.

Barrie can be contacted by email at [email protected] or by

telephone on 01296 613828.

iiiA THOROGOOD SPECIAL BRIEFING

Preface

This Special Briefing distils nearly 40 years of my deal-making, both as a principal

and a corporate finance adviser, to reveal the trade secrets which are rarely written

about and to spell out the hard truths about the avoidable traps executives and

professional advisers often fall into.

Group executives and business owners thinking about making an acquisition

will gain invaluable insights into achieving the best possible deal, and ensuring

effective post acquisition management from the outset. Equally, people contem-

plating a sale of a business will benefit from understanding the process from

the acquirers standpoint, as well as their own.

Professional advisers are acutely aware of the effort needed to make a pitch to

win an assignment, especially in a beauty parade, and their success rate may

well be less than 25%. By a better understanding of what clients want from their

advisers, and important details which lose assignments, the outcome will be a

higher rate of winning assignments and more deals completed for their clients.

This Special Briefing is laced with proven tactical advice to ensure that deals are

completed, because losing a deal by adopting the wrong tactics is unforgivable.

Although I am a qualified accountant, it is people handling skills rather than

financial analysis which win or lose deals.

Yet again, Claire Sargent has made time to word process this manuscript whilst

doing a demanding full-time job.

Barrie Pearson

REALIZATION

Campbell House

Weston Turville

Bucks HP22 5RQ

TRADE SECRETS OF BUSINESS ACQUISITIONS

iv A THOROGOOD SPECIAL BRIEFING

Contents

1 REALITY, STRATEGY, OPPORTUNISM AND THEORY 1

Most acquisitions underperform ...............................................................2

Safer and risky acquisitions........................................................................2

Kissing frogs is essential.............................................................................4

Commercial due diligence is vital ..............................................................5

Opportunism is a must................................................................................5

Mergers should never happen – well, hardly ever...................................7

Stock market listed acquisition targets .....................................................8

2 WHAT BUYERS SHOULD SEEK… AND AVOID 9

Management continuity is a key issue.....................................................10

Consistent sales and profit growth history are valid comfort ..............12

Sales and profit forecasts must be robust...............................................13

Demonstrable cash generation is a major plus ......................................13

Realizable surplus assets are a plus factor..............................................14

Tax and VAT need to be clean ..................................................................14

Undue customer or supplier dependence is a potential risk ...............14

Major customer contracts due for renewal are a cause for concern....15

Relocation may be a plus or a minus.......................................................15

3 DEVELOP YOUR STRATEGY INTO AN ACQUISITION PROFILE 17

Strategy needs focus .................................................................................18

Evaluate alternatives to acquisition.........................................................19

Organic growth..........................................................................................19

Trading agreements...................................................................................20

Strategic alliances......................................................................................21

vA THOROGOOD SPECIAL BRIEFING

Minority equity stakes...............................................................................22

A joint venture or consortium..................................................................23

A majority equity stake .............................................................................24

Performance-related deals........................................................................24

Assess the likely number of acquisition targets .....................................25

Write an acquisition profile to focus your acquisition search..............26

Maximum cash available for acquisition ................................................27

4 FIND RELEVANT TARGETS AND WOO VENDORS 31

A UK in-house search – initial stages ......................................................32

Be wary of using external advisers..........................................................33

An in-house UK search – main search ....................................................35

Don’t just contact vendors, woo them from the outset .........................36

The initial meeting with the vendors.......................................................37

The key meeting to obtain streetwise information from the vendors....39

An overseas search....................................................................................40

5 USE COMMERCIAL COMMON SENSE TO VALUE A BUSINESS AND MAKE AN OFFER 43

Adjusted profit history and forecasts are vital .......................................44

Quantify major cost rationalization opportunities.................................47

Calculate the adjusted net assets .............................................................48

Use your own adjusted profits for valuation .........................................49

Structure the offer to reflect vulnerabilities ...........................................51

Discuss your offer face-to-face with the vendors ..................................52

6 NEGOTIATE THE DEAL AND SIGN HEADS OF AGREEMENT 53

Negotiate the Heads of Agreement .........................................................54

Earn-out deals need defining ..................................................................58

Warranties and indemnities need to be negotiated ..............................60

Fix the maximum liability of the vendors................................................60


vi A THOROGOOD SPECIAL BRIEFING

Joint and several liability for vendors .....................................................60

Agree the basis to trigger a warranty claim against the vendors........61

7 STEER THE DEAL SAFELY TO LEGALCOMPLETION 63

Effective commercial due diligence is vital .............................................64

Environmental due diligence needs to be done on every deal .............65

Financial due diligence must include profit forecasts

and the order book ....................................................................................66

Pension due diligence................................................................................67

Legal due diligence should include contractual issues

and regulatory compliance .......................................................................67

Assess the disclosure statement by the vendor

and negotiate changes ..............................................................................68

Prepare to announce the deal internally and externally........................68

8 POST ACQUISITION MANAGEMENT: TURN AROUND LOSS MAKING COMPANIESEFFECTIVELY AND QUICKLY 71

Make an initial impact ...............................................................................72

Set up reporting relationships and authority limits...............................75

Establish clear rules for handling the media ..........................................75

Keep head office interference to a minimum..........................................75

Get an overview of the business ..............................................................76

Start with the sales team...........................................................................76

Scrutinize overhead and administration costs .......................................78

Tackle production and procurement costs… and opportunities ..........79

Set relevant short-term forecasts and objectives...................................80

Financial planning and control need clear priorities ............................81

Create a budget for the new financial year.............................................81

Examine research and development .......................................................82

Address the medium-term future for the business................................83

Make redundancies urgently and humanely ..........................................85

CONTENTS

viiA THOROGOOD SPECIAL BRIEFING

9 UTILIZE EXPERT STREETWISE TACTICS 87

Discuss the structure and form of consideration

before making a written offer ..................................................................88

Realize that too low an initial offer may lose the deal ...........................89

Reveal any onerous conditions early to reduce their impact................90

Spell out and sell your management approach......................................90

Recognize that your conduct prior to completion is crucial.................91

When negotiating the final deal it is unlikely that

the vendors can justify a higher offer .....................................................91

Criticizing the business to the owners must be avoided.......................91

Quid pros quos are an effective way for win-win negotiation .............92

When no agreement is reached, keep the door open............................92

10 CHOOSE AND APPOINT ADVISERS WITH CARE 93

Identify the help and advice you need and want ...................................94

Recognize the advice and help which is available .................................96

Create an effective beauty parade to select advisers.............................97

Always agree fees and negotiate the engagement

letter before appointment .........................................................................98

Telephone references on individual advisers really are valuable .........99

Ensure advisers keep you informed of progress ...................................99


viii A THOROGOOD SPECIAL BRIEFING

Chapter 1Reality, Strategy, Opportunism and Theory

Most acquisitions underperform

Safer and risky acquisitions

Kissing frogs is essential

Commercial due diligence is vital

Opportunism is a must

Mergers should never happen – well, hardly ever

Stock market listed acquisition targets


Chapter 1Reality, Strategy, Opportunism and Theory

Your acquisition strategy must be firmly rooted in reality, opportunism is needed

to complete deals, but theory is a waste of time.

Most acquisitions underperform

The stark reality is that well over 50% of acquisitions underperform compared

with pre-deal expectations, as judged by the acquirer with the benefit of hindsight.

This is based on research carried out over the past 25 years from a variety of

studies around the world. Press articles underline this evidence by reporting

profit warnings which reflect underperformance from many acquisitions

Safer and risky acquisitions

Tangible evidence, rather than theory, offers an insight into safer acquisitions

and risky bets, but there is rarely ever guaranteed success.

Market leadership or increased market share

Over many years there is clear evidence that the market leader is likely to be

the most profitable in the sector. So acquisitions which enable a company to

achieve market leadership in the existing segments and territories already served

should be regarded as safer, provided there are no anti-monopoly problems and

the pursuit of diminishing returns will be avoided.

Similarly, increased market share is a valid goal, particularly for a company to

become one of the three largest players in the sector. This means that prospec-

tive customers are likely to be motivated to find out what you offer because of

your visibility in the sector. Similarly, if the market leader is allowed to dominate

the market, the number two and three players have legitimate concerns. So there


2 A THOROGOOD SPECIAL BRIEFING

is sense in, say, the number two and three coming together to create a more

serious competitor.

Acquire a niche business

Niche businesses, which are relevant to your strategy and are market leaders

in their segment, often prove to be robust acquisitions. The reasons are that their

market share will continue to provide the momentum needed post-acquisition,

and the smallness of a niche market means that other companies are unlikely

to enter the segment.

An example is an international support services company that entered the hospital

trust car park management segment by acquiring the market leader in the UK,

and this helped them to expand geographically as well.

Broaden the product or service range

The rationale for this approach is to achieve more of a one-stop offering to

customers and clients, and benefit from cross-selling opportunities for other

services. An example could be that a marketing services group acquires a public

opinion survey company. Many companies have found, however, that it is much

more difficult than expected to realize cross-selling benefits.

To enter an important distribution channel

In recent years, supermarkets have carved a significant market share in selling

wines and flowers. Likewise, some supermarkets have built up sizeable chains

of small outlets serving local communities and inner city neighbourhoods. The

route has been several acquisitions of local store chains, because it would take

far too long to obtain planning permission and build new outlets or to acquire

leasehold premises piecemeal.

To secure a key supplier

Some companies are highly dependent on one supplier to provide a continuing

source of supply. Whilst it can be argued that a second source should have been

developed years ago, the reality now is that if a competitor acquired this vital

source of supply it could cause serious problems. On the other hand, when a

key supplier is acquired, other customers will seek alternative sources. Conse-

quently, there needs to be a strong case to protect a key supply by acquisition.

1 REALITY, STRATEGY, OPPORTUNISM AND THEORY

3A THOROGOOD SPECIAL BRIEFING

If an important supplier approaches your company to acquire a minor equity

stake, perhaps coupled with a loan, my advice is not to invest in these circum-

stances and instead to find or develop another source of supply urgently.

To provide cost rationalization opportunities

Cost rationalization as a benefit of acquisition seems attractive. For many

acquirers, however, unlocking synergy has proved to be as difficult as spotting

the Loch Ness monster on a dark and foggy night. Successful delivery of post-

acquisition synergy needs to be based on identified savings pre-deal! It is not

enough to guesstimate that head office costs will yield a 20% reduction across

the board. Specific individuals need to be identified and other savings rigor-

ously evaluated.

Overseas acquisitions

The highest risk category of acquisitions is probably overseas acquisitions.

Anyone considering an acquisition of a company in a new market sector in a

country where there is no existing subsidiary, should first of all learn to walk

on water at the local swimming pool; in other words – forget it!

The lowest risk category is to acquire a bolt-on acquisition for an existing

subsidiary overseas. Intermediate risk categories to extend geographical cover

are to acquire a business in an adjacent market segment in a country with an

existing subsidiary, but to acquire a similar business overseas in a country without

an existing operation is a higher risk.

Kissing frogs is essential

Some years ago a listed company told me that 12 unquoted companies had been

acquired within two years and in every case the vendors made the initial approach.

No other acquisitions had been identified. This stemmed from a new chief execu-

tive determined to consolidate a fragmented sector. Within a further three years

the group was put into administration. The financial director told me that the

board was flattered by these unsolicited approaches. The reality was the private

vendors recognized a lucrative band wagon for them and jumped aboard. The

company overpaid significantly, did inadequate due diligence and made a mess

of integrating the businesses acquired.



In stark contrast, the most successful acquirers I have been privileged to advise

probably considered at least ten targets, in a differing amount of detail, for every

acquisition completed. In other words, they know that kissing frogs is a must!

Commercial due diligence is vital

The single most frequent cause of an underperforming acquisition is that the

acquirer took the commercial well-being of a target company on trust. The vendors

sales pitch was enough to hook a deal. Ten years ago many acquirers ignored

commercial due diligence, and some still do today. Private equity houses, however,

are committed to commercial due diligence as a matter of routine.

Accountancy firms have an established track record in providing financial and

tax due diligence, and many now offer commercial due diligence as well to

maximize their fee income from a deal. Too often it is done by people who are

resprayed auditors, as I call them, who lack commercial insight. Fortunately,

specialist firms now provide commercial due diligence.

Some of the issues where commercial due diligence is appropriate includes an

investigation of:

• customer satisfaction, compared against competitors

• the awareness and reaction of non-customers to the target company

• the distribution channels used, compared with rapidly growing,

mature or declining channels

• the standing of the company as a potential employer

• the anticipated impact of technology on the sector and the target company

The key to commercial due diligence is to identify and focus on those issues which

are most important for the future success of the particular target company.

Opportunism is a must

It may seem to be a contradiction that my message is all about a measured and

rigorous approach to every acquisition, and yet I regard opportunism to be a

must. There is no contradiction whatsoever. Relevant acquisition targets decide

when they wish to sell and you may be made aware of a sale by the corporate



finance adviser acting for the vendors. Provided that acquisition criteria have

been formulated, preferably in the form of a written Acquisition Profile

(described in Chapter 3) it will be easy to judge the relevance and importance,

or not, of the target company for you. The timing of the vendors may conflict

with your budgetary season, or whatever, so be it! Nonetheless, you need to pursue

the opportunity.

I know of one chief executive who reacts differently. He is always on the look

out for a bargain deal and commits resources to pursue every deal which crosses

his desk. As a result, there is a massive waste of management time because there

is no focus and he rarely ever completes a deal.

Receivership opportunities are another potential time waster. Within two days

of the announcement of receivership, the receiver may announce that about sixty

expressions of interest have been made. Only a handful of prospective acquirers

will be invited to meet the receiver, and they will be expected to respond as a

matter of urgency. So, first of all, decide that the opportunity really is relevant

before making any contact.

If the business is acquired from receivership, management must be injected from

the outset. It is absolutely naïve to think that installing a good finance director

will restore success. A stand-alone business requires a full-time chief executive

and a finance director, and there is no substitute for a chief executive with

successful turn-around experience.

A controlled auction of a business may prove to be a major time wasting exercise.

The first step is to understand the typical controlled auction process:

• The sale of a business, usually a division or subsidiary of a group rather

than a private company, will be announced in the press by a news article

and not by an advert.

• In addition, the corporate finance advisers may contact selected bidders

at home and overseas to make sure that people are aware of the

opportunity.

• Prospective purchasers will be required to make a written offer, typically

within four to six weeks, and without any contact with the management

team. The offer needs to be made purely on the lengthy information

memorandum prepared by an accountancy firm on behalf of the

vendors.



• Up to 25 offers may be received, and these will be reduced to five or

six – and may include an MBO from the management team or private

equity players acting as principals.

• The short-listed bidders will be given access to an on-line ‘data room’,

and invited to carry out the bulk of their due diligence and to meet

the management team. Often the vendor will release the draft Share

Purchase and Sale Agreement to be used.

• Typically only about two or three weeks will be allowed to submit a

final offer, which may be higher or lower than the initial offer.

• Usually two bidders are selected, with one of them ‘kept warm’ in reserve,

and the aim is to rapidly complete any outstanding due diligence and

to have final negotiations prior to legally completing the purchase.

The fundamental difference compared with the usual sale process is the timing

of due diligence.

In a controlled auction, a substantial amount of due diligence needs to be done

prior to the second round of offers. This requires not only in-house manage-

ment resources, but costly work which needs doing by third parties and you

may not be selected to go forward as one of the two preferred bidders.

In contrast to the usual sales process, Heads of Agreement are signed and a

period of exclusivity given to the prospective purchaser to carry out due diligence

and complete the deal.

Consequently, the risk of abortive management time and due diligence fees is

much greater in a controlled auction. So there is a clear cut message – do not

enter a controlled auction unless the target really is relevant for you and you

believe that you are well placed to be successful.

Mergers should never happen – well, hardly ever

Probably only one in ten merger attempts result in a completed deal. Why? The

two companies simply fail to agree on the split of the equity. Merger attempts

often start out in an amicable way, because the people involved have ‘known’

each other for years, and end in recriminations and annoyance that so much

management time and advisory fees have been wasted.



Two issues need to be agreed at the outset:

• the split of equity, which may require one party to inject cash or extract

it, to achieve the desired split; and

• the top management structure agreed by job definition and choice of

individuals. It is nonsense to even think of joint managing directors,

joint marketing directors or whatever. There will be too many

directors and some will need to leave.

Only when the equity split and management team have been agreed, should

advisory fees be incurred. An awful situation is where each party appoints corpo-

rate finance advisers to value both businesses or to recommend the equity split

and any cash adjustment needed. Worse still, I know of cases where each party

rejected the proposal and agreed to have a third advisory firm, and yet more

fees, to decide what is fair. Even this may well result in deadlock.

Stock market listed acquisition targets

Failed attempts to acquire a listed company are expensive and the ensuing press

coverage may be adverse. If the bid is to be hostile, higher bids may be triggered.

When a bid approach is made on an expectation of an agreed offer, the likeli-

hood of success is greater but other bidders may still come forward.

My advice is not to attempt a hostile bid unless there is a compelling commer-

cial rationale and a rigorously evaluated likelihood of success.

Whether friendly or hostile, however, an investment bank should be appointed

to advise well before any approach is made. Stock exchange regulations require

a ‘standard’ timetable to be followed and careful handling of the transaction to

ensure that the correct procedures are followed, so these situations are outside

of the scope of this Special Briefing.



Chapter 2What buyers should seek…and avoid

Management continuity is a key issue

Consistent sales and profit growth history are valid comfort

Sales and profit forecasts must be robust

Demonstrable cash generation is a major plus

Realizable surplus assets are a plus factor

Tax and VAT need to be clean

Undue customer or supplier dependence is a potential risk

Major customer contracts due for renewal are a cause for concern

Relocation may be a plus or a minus


Chapter 2What buyers should seek…and avoid

It is so easy for commercial commonsense to go out of the window amid the

excitement of a winning a deal. Any idea of winning or losing is totally out of

place. Crazy though it is, I have known directors to calculate the amount of synergy

required to gain investment committee approval. I repeat that synergy must be

based on identified and deliverable action, with the realization that many acquirers

have discovered that unlocking synergy will result in significant additional costs

initially and take longer than expected.

An example of so-called tangible and deliverable synergy is where both the

acquirer and the vendor have a national sales force serving the same market.

Imagine that the combined sales force add up to 130 people, and it is agreed

that 100 will be ample for the merged operation. The evaluation required involves:

The 30 people to leave are identified, together with the redundancy payments

necessary. This is likely to be a significant one-off cost.

As a result of overlap or underlap of individual territories some people will need

to be persuaded to relocate, with the ensuing one-off cost of relocation and the

likely cost of an improved package as a ‘sweetener’.

Additionally, basic salaries, incentives for sales achieved, allowable expenses

and company cars will need to be harmonized. Invariably, this requires harmo-

nizing upwards rather than downwards.

Management continuity is a key issue

On numerous occasions the acquiring team has told me that the owner-direc-

tors of the target company were not ‘professional’ managers. Exactly right! But

it misses the point completely. They were entrepreneurs, with a highly devel-

oped commercial instinct based on many years of hands-on experience and

knowledge of the market sector.



Their concerns are likely to be motivating staff to share their own passion for

the business, winning new business, staying close to existing customers and

experimenting with new product or service ideas. Formal five year business plans,

investment appraisals for capital expenditure and suchlike may be non-existent

or rudimentary at best. So what? These can be introduced later, hopefully without

losing too much of the entrepreneurial flair.

It is vital to understand what the owner-directors contribute to the business and

how they spend their time. Wiley owner-directors wishing to leave the business

as soon as possible after legal completion, will understate their own value. And

don’t be fooled if an internal candidate was promoted to ‘managing director’,

shortly before a sale was initiated, probably on the suggestion of the advisers

grooming the business not just for sale, but for a quick personal exit as well.

The importance of owner-directors may not be obvious. One target company

received over 40% of total sales from one blue chip customer. The owner-director

said that the account ran like clockwork because of the care and attention of

many staff. He ‘forgot’ to mention that the procurement director sailed regularly

on his luxury yacht. In another case, senior staff retention was outstanding in

contrast to the sector as a whole where staff turnover was high. The reason?

The owner-director was truly inspirational and had built up massive staff loyalty.

In another case, an insurance broking business employed about 100 staff including

a dedicated sales force. The reality? The three owner-directors won more than

80% of new business, and the sales force concentrated on ‘maintaining and

servicing’ customers.

The most critical period for a newly acquired business is the first few weeks

and months. Even mildly dissatisfied customers may decide to have a second

supplier or to invite other suppliers to pitch for the business. Staff are likely to

be nervous and suspicious, perhaps wrongly assuming the risk of redundancy.

So, unsolicited job offers and attractive job adverts may be tempting. Eradicating

a company name may cause greater upheaval than ever expected. In Living-

stone Guarantee, the name meant a lot to staff at all levels, and I was delighted

when the acquirer deciding not only to maintain the name, but brought their

much larger corporate finance division under our name and management control

as well.

In certain circumstances, the key issue may be to lose the top management just

as soon as possible. For example, when an international contract caterer acquires

a regional business, the commercial rationale will be to fold the acquired company

into the existing regional management, and to lose not only the owner-direc-

tors but quite a lot of other staff and the premises as well.

2 WHAT BUYERS SHOULD SEEK… AND AVOID


Consistent sales and profit growth history are valid comfort

Your reaction may well be that this is comparable to driving a car using only

rear view mirrors. Not at all. I passionately believe that the three previous years

performance of a target company must be understood and analyzed.

It is commonplace for an Information Memorandum to show the adjusted profit

before tax, possibly with the adjustments merely mentioned as footnotes. This

can be misleading when vendors take a liberal view of valid adjustments.

Some one-off events are valid, for example, a substantial bad debt when a ‘blue

chip’ customer suddenly crashed or the revenue costs of moving office. Others

are not. The cost of hiring, say, a managing director who was dismissed within

months is a management mistake. Executive search fees, the salary paid and

the leaving package are not valid adjustments. Similarly, if an owner-director

is to retire at legal completion, the total employment costs should not be ‘added

back’, if the person is to be replaced by hiring a lower cost person. Even then

the net adjustment should only be made to future projections.

One-off events may have boosted sales and profits. For example, the introduc-

tion of new health and safety legislation may have boosted not only the previous

years performance, but the current year as well. Similarly, the company may

have won a one-off contract with, say, a Middle East customer which will come

to conclusion during the next few months because the project will be completed.

The essential step is for the acquirer to produce a separate adjusted sales and

profit history which, reflects any extra costs which would have been incurred

as a group subsidiary. For example, the level of insurance cover may be regarded

as inadequate or key staff may be being paid well below market rates.

The adjusted sales and profit figures establish the level of sustainable profit which

is the platform for future projections. If the vendors have overstated the adjusted

figures, then the forward projections could be overly ambitious unless amended

by the acquirer.

If the adjusted figures reveal significant swings in sales and profits, the reasons

must be understood. The rapid recovery from a previous years loss to a healthy

current year profit, may have been deliberately boosted by overstating provi-

sions and releasing unnecessary provisions in the current year.



Sales and profit forecasts must be robust

Vendors are prone to make ambitious forecasts for the current year and the next

two years to maximize the valuation.

Some acquirers respond by attacking the forecasts and attempting to get the

vendors to reduce their projections, but it is highly unlikely they will agree and

the rapport between both sides could be soured. My advice is to:

ask the vendors to explain the basis of their forecasts and the underlying reasons.

If the forecasts are over optimistic, say so and explain why politely;

then the acquirer should compile his own forecasts and base the valuation on

them, taking into account any additional costs as outlined earlier.

Overstated forecasts by vendors may be based on an arbitrary, say, 15% annual

compound sales growth largely without any tangible reasons. Similarly, fixed

cost projections may remain virtually unchanged despite the fact that sales are

projected to increase substantially. My experience is that so called fixed people

costs are remarkably variable.

Demonstrable cash generation is a major plus

A profitable company will not necessarily survive. Survival is dictated by cash

flow generation. Namely, the ability to pay invoices and not to exceed an overdraft

limit which causes the bank to impose penal sanctions. An overdraft is renew-

able annually and repayable on demand. Never forget that.

A management buy-out is financed by a lot of debt and the bank will impose

covenants for the ‘cover’ of interest payable by profit. Failure to operate within

the covenanted limits set by the bank will bring a swift and tough response.

In contrast, a consistently cash generative business is a joy to own. An excel-

lent example is a subscription magazine, where the annual subscription is often

collected by direct debit before the first issue is delivered! Many other service

companies are inherently cash generative too, because sizeable cash deposits

are payable on placing the order.



Realizable surplus assets are a plus factor

A freehold warehouse may soon become vacant by using available floor space

within the group. The cash flow benefit must reflect a realistic view of market

value and saleability, agents fees and the time needed to complete a sale.

If there are unwanted items of equipment and redundant stock, it makes sense

to sell them to release floor space and to help good housekeeping, even though

the cash realized may be modest.

Tax and VAT need to be clean

It would be naïve to regard tax and VAT to be a non-issue because the vendors

will be obliged to provide a full indemnity for any unexpected liabilities up to

legal completion. Accounting fees to handle issues which arise will be covered

by the indemnity, but there is likely to be significant in-house management time

involved as well.

Ideally, the vendors will have ensured that up-to-date tax and VAT returns have

been submitted and agreed. If there is an Inland Revenue investigation pending

or in progress this should be cause for concern. An investigation may start on

a seemingly limited basis, but it will be widened in scope as necessary. Further-

more, two years may be needed to reach final agreement with the authorities.

Unless part of the purchase consideration is to be held in an escrow account,

there is always a risk that it may prove difficult to get payment from the vendors.

By then, the cash received may have been given to the next family generation

or placed in an obscure Liechtenstein based trust, or whatever.

Undue customer or supplier dependence is a potential risk

There are cases where one customer accounts for more than 70% of total sales

in the target company. The vendors are likely to stress that the account has grown

annually for the past twenty years. So be it, but it is cold comfort. The customer

may be taken over and a rationalization of suppliers implemented.

It is quite commonplace in service companies that, say, the five largest clients

will account for 80% of the total sales. If any one of these is lost the company



may be plunged into loss, and it is unlikely that cuts can be made in fixed costs

to offset completely the loss of gross margin.

Supplier dependence may pose a real threat. I have come across cases where

there is a no written agreement at all, because the two parties could not agree

the wording but the target company was ‘assured’ that they would have an exclu-

sive supply agreement for as long as desired. Recent face-to-face contact with

the supplier may have been occasional at best. The source of supply could be

China, Thailand or Cambodia, or wherever. Without an adequate written contact,

however, the source of supply may switch to other customers and exclusivity

will be lost.

Major customer contracts due for renewal are a cause for concern

Many facilities management supply agreements are based on a fixed period of

between one and seven years. If a major customer contract is due for renewal

within a few months there is legitimate cause for concern. The answer might

be to wait until the contact is renewed before legal completion, but by then another

major contract renewal may be imminent.

Worse still, some of these contracts give the customer the right to terminate

the contract prematurely at, say, three months notice. Some comfort may be

achieved by the vendors agreeing to meetings with a handful of major clients,

but only when all of the contract details have been agreed and only within seven

days of legal completion. An alternative response may be to obtain an indem-

nity against identified contracts not being renewed and cash placed in an escrow

account. The wording will be a contentious issue, however, and could become

a deal breaker.

Relocation may be a plus or a minus

Existing floor space within the target company may be inadequate to handle

the projected growth. The vendors may agree to retain the freehold and to rent

the premises for an agreed period of time, which could provide sufficient time

to move to other premises with ample room for expansion.



If the vendors wish to retain the freehold to benefit from development for alter-

native use, perhaps for residential housing or a supermarket site, this could be

a plus factor, provided you are satisfied that alternative premises can be found

locally and you obtain a rental agreement offering ample time to relocate. For

example, if the vendors are only prepared to offer 12 months continued usage,

it means that relocation must become an urgent priority immediately on legal

completion.



Chapter 3Develop your strategy into anacquisition profile

Strategy needs focus

Evaluate alternatives to acquisition

Organic growth

Trading agreements

Strategic alliances

Minority equity stakes

A joint venture or consortium

A majority equity stake

Performance-related deals

Assess the likely number of acquisition targets

Write an acquisition profile to focus your acquisition search

Maximum cash available for acquisition


Chapter 3Develop your strategy into anacquisition profile

An effective strategy needs to define market segments, commercial rationale

and priorities. It cannot be shrouded in vague aspirations if an acquisition search

is to be successful. Probably the worst case I ever came across was the finance

director of a private group who was seeking help to sell a subsidiary which was

deemed to be non-core. I discovered that it had been acquired only four years

ago and the group managing director ‘could not remember why it was

acquired’. The financial director had only joined 18 months ago, and so he

regarded himself as innocent. You might feel that I have described a unique situa-

tion, however, there are plenty of lesser cases of sloppy thinking giving rise to

expensive acquisition mistakes.

The vital ingredients for a successful acquisition campaign are:

• a clearly articulated strategy

• an evaluation of the alternatives to an acquisition

• recognition of the management strengths and resources available within

the group

• the purchasing power available and/or obtainable to fund the acquisition

• a written Acquisition Profile, agreed by the board, as the template to

measure the relevance of possible acquisition targets and to focus on

acquisition search

Strategy needs focus

The following questions should be answered rigorously to provide sufficient clarity

and focus for a strategy to be a powerful tool to develop the company or group,

either by organic growth, other alternatives or acquisitions:

• Which existing market segments should we concentrate our future effort

and investment on? Why? Has the choice been researched adequately?

• Which countries (or regions) should we concentrate on?



• Which market segments and countries/regions do we plan to enter?

Have we considered alternatives adequately and rigorously evaluated

the new opportunities selected?

• How will our commercial rationale differentiate us from our competitors?

• Which market segments, countries and products should we phase out

or withdraw from?

• Which divisions and subsidiaries should we consider selling, or

encourage management buy-outs for?

• What finance, people and expertise can be made available to achieve

our goals? Are these adequate? If not, how can the shortfall be overcome

at an acceptable cost?

• What threats or opportunities may be posed by developments in

technology, social change, political factors, terrorism or international

pandemic? What contingency plans are needed?

• Are our organizational structure, management development

programmes and staff recruitment programmes designed to help

achieve our plans? If not, what changes should be made?

Evaluate alternatives to acquisition

There is abundant anecdotal evidence that directors and senior executives enjoy

the excitement of the ‘acquisition game’. But it is not a game, it is deadly serious

because outright acquisition is so often the highest risk option. It is totally inade-

quate to give merely passing thought to other alternatives: they must be assessed

in a thorough and positive way. The pros and cons of alternatives to acquisi-

tion are set out below.

Organic growth

Organic growth is boring and hard work, but it is a powerful and cost effective

way to grow a business. Furthermore, the medium-term success of any acqui-

sition will require a commitment to organic growth within the business. It would

be naive to think that a string of bolt-on acquisitions will eliminate the need for

organic growth, because they are more likely to create a rag bag of businesses.

3 DEVELOP YOUR STRATEGY INTO AN ACQUISITION PROFILE


If a market segment is growing rapidly or the company has been slow to enter

it, I accept that belated organic growth may be too little too late.

Team head-hunting should be considered. There are countless cases in a wide

range of service businesses, where recruiting a nucleus of key people has accel-

erated growth. More importantly, entire teams have been recruited successfully.

The key requirement is to offer a medium-term opportunity to accumulate wealth

in addition to a competitive salary and bonus package. It is not necessary to

give an actual shareholding at the outset, options or even ‘phantom’ options

can be used. It is vital, however, to construct a scheme which does not incen-

tivize key people to leave by cashing in at a time of their choosing.

Even a highly respected investment bank fell into this trap. A team leader and

three key executives were recruited to enter a new market segment. Unfortu-

nately, after two years each person could realize their capital gain for cash

whenever they wished. Unexpectedly, the team leader came under pressure from

his wife for the family to return to their native Scotland. The capital gain avail-

able was such that he could retire from investment banking, buy a country house

and start up a new business. Worse was to follow, within six months the other

key members left because the departure of the team leader left a gaping hole

in the business unit.

Trading agreements

When pursuing diversification into either a new market segment or overseas,

a trading agreement can offer a tremendous learning opportunity and generate

worthwhile profits and cash flow for a modest investment. Alternatively a trading

agreement may be a valid strategic goal.

Supermarkets, and even soccer clubs, may decide to exploit their brand

strength by offering a mobile phone service to their customers or financial services

such as a credit card. Typically, the supermarket or soccer club will enter the

market by securing a trading agreement with a major mobile phone operator

or financial institution.

Serendipity is unlikely to provide you with trading agreements. A clearly artic-

ulated strategy is required and the initiative taken to find a suitable partner. If

agreements in a particular market segment are either infrequent or unknown,

do not be deterred. The approach needs to be exposing your company to the

risk of success, by knocking on doors and kissing lots of frogs to find your trading

partner.



Strategic alliances

My definition of a strategic alliance is simply a business development project

carried out by two or more organizations, without necessarily creating a new

limited liability company or taking an equity stake.

For example, car manufacturers such as Ferrari will fund a dedicated Formula

1 team as a logical development of their business. For independent teams,

however, adequate funding to have a competitive team must rely on commer-

cial sponsors, and this has become more difficult as a result of European Union

legislation restricting sponsorship by cigarette manufacturers. Developing and

manufacturing a suitable engine is unaffordable and it may be necessary to form

a trading agreement for the supply of suitable engines.

Another form of strategic alliance could be to fund a dedicated research team

in a university which is recognized as a centre of excellence within the industry

sector, to develop a new process, technology or product. The ‘partnership’ may

include using the developments for academic purposes and publication in due

course, provided that the commercial interests of the funding partner are

adequately protected.

Some professional bodies have chosen to outsource the provision of dedicated

training courses and seminars to a specialist company, rather than create an

in-house capability. The important features include:

• a fixed term agreement with renewal options and a break clause

• the design of courses and seminars which meet the needs of members,

and are not merely standard courses which are ‘re-badged’

• either a profit sharing agreement or a management fee paid to the

provider

Successful strategic alliances have led, in some cases, to the formation of a jointly

owned company. There are many more cases, however, where one partner has

become dissatisfied and the alliance terminated because not enough attention

was given to discussing the management styles, the decision making process,

and the resources to be provided by each partner. Compatibility is the key to

success, but the rationale for the alliance may simply expire for one of the partners

and they will want an exit.



Minority equity stakes

Some business executives naively think that acquiring a minority equity stake

reduces the risk involved. Clearly, should the business fail then the financial

damage will be less, but it does not justify any less commercial, environmental

and financial due diligence compared with outright acquisition.

Acquiring a minority equity stake is recommended only in specific circumstances.

The danger which must be avoided is being ‘locked’ into an unlisted company

without management control, or even significant influence. In such a case the

only available way to realize the investment may be to offer the minority equity

stake for purchase by the other shareholders. There can be no guarantee that

they will be prepared to buy the equity, and the price offered may be downright

unattractive or unacceptable.

A minority stake may be appropriate when purchasing in a country where one

has limited knowledge of the cultural, social and management customs. If a

minority stake is acquired the purchase should provide:

immediate board representation to enable the purchaser the opportunity to learn

more about the country and the business from within, and to influence future

development

an option to acquire either majority or outright control within a given period

and at a prescribed price or valuation formula

In some countries, legislation demands that foreign companies are restricted

to minority equity stakes in certain industries. Provided management control

can be achieved, this may be better than rejecting the opportunity altogether.

Another key factor in the decision may be the ability or otherwise to repatriate

funds.

One reason to acquire and retain only a minority stake may be to secure distri-

bution outlets. For example, in some countries an oil company may acquire a

minority equity stake in several commercial oil distributors to ensure distribu-

tion outlets for its own products.

Another possible reason for taking a minority stake is to seek some form of prefer-

ential treatment from a key supplier. This may be a sound reason, but the trap

of investing in a key supplier to avoid the company being wound up could prove

to be an expensive way of merely delaying the inevitable loss of a source of supply.



Whenever a minority stake in a supplier is being considered, the commercial

rationale should be rigorously examined and alternative sources of supply evalu-

ated before deciding to invest.

A joint venture or consortium

Based on personal experience, some people dismiss any thought of a joint venture

as merely a recipe for backbiting between the partners. I readily admit that this

could and does happen on occasions, but it can be avoided. The oil industry

and the international civil engineering sector have had to make joint ventures

and consortiums work because:

• the financial risks involved in a speculative oil exploration project may

be unacceptably large even for a global company

• the construction of a major dam may require other partners to

contribute specialist expertise such as underwater engineering

The key tips for success:

• Select partners with compatible management and decision-making

styles, as well as a common language capability. UK companies may

find that Scandinavian or Japanese companies operate very differently.

• Agree at the outset the management team to run the venture based

on either individual ability and experience or the most suitable

partner, not necessarily the largest shareholder.

• Avoid any undue interference in managing the venture by non-executive

directors or group staff.

• Realize at the outset that within a few years the commercial objectives

of the partners do change. It may make sense for one partner to buy

out the others, to sell the business or pursue a stock market flotation.

To discuss this openly before creating a joint venture company is to

be realistic and not negative at all. It requires more that a clause in

the articles or management agreement such as any partner may offer

to buy out another by making a written offer and then 30 days are

allowed to make a counter offer, say, at least 5% higher. Discussion

of the issues involved are essential, and some contractual clause may

prove to be totally unworkable.



A majority equity stake

I find it difficult to justify taking a majority equity stake rather than acquiring

100% at the outset for a domestic acquisition. Possible different expectations

may include:

• the individual vendors expect to receive a dividend to boost their

income, contrary to group policy

• additional funds may be needed for expansion, but individual vendors

will not expect to provide cash or to guarantee a loan

• the formula, conditions and timescale for the obligatory sale or purchase

of the minority stake

It would be entirely wrong to assume that a minority stake is the only way for

vendors to receive a deferred capital gain. A more relevant option is to negotiate

a performance-related purchase which is explained in the following section.

When acquiring overseas, however, persuading the vendors to retain an equity

stake or inviting a local partner to invest may make good sense.

A Footsie 100 group in the financial services sector decided to enter the Italian

retail investment product sector. Their concern was that market research showed

that Italians had a marked preference to invest their savings with a company

with an ‘Italian feel’ about it. The answer was to find a local financial services

company in an adjacent market segment and persuade them not only to co-invest

but to find an Italian chairperson and two non-executives who would command

the respect of Italian customers.

Performance-related deals

Most acquirers recognize that an attractive service contract is unlikely to maintain

the motivation and commitment of a vendor who has made a large capital gain

by selling shares.

A performance-related purchase, often referred to as an earn-out deal, assumes

that:

• 100% of the equity is acquired at the outset at a price which reflects

the performance and assets of the company to date

• the vendors have a contractual right to receive a deferred capital gain

provided that agreed profit before tax targets are achieved during the

remainder of the current financial year and usually either one or two

subsequent years



Vendors are likely to require that:

• the company continues as a stand-alone business during the earn-out

period, rather than be merged with another business or operation

• one of them continues as managing director throughout the earn-out

period

• all continuing directors will have a fixed term service contract for the

earn-out period plus, say, a further three months during which time

the final accounts can be agreed as a basis for calculating any earn-

out payments

Purchasers dislike earn-out deals just as much as vendors do because of the added

complexities involved. Furthermore, many corporate financial advisers have insuf-

ficient knowledge and experience to negotiate an earn-out deal, but this will not

necessarily deter them from trying.

Chapter 6 contains detailed guidance as to how to formulate and negotiate an

earn-out deal. I started life as a corporate finance advisor with an unfair advan-

tage, acting as a principal I had negotiated six earn-out deals and was

accountable for them until the final amount of earn-out payment was calculated.

Assess the likely number of acquisition targets

This needs to be done as an integral part of deciding the most relevant option

to select. If the likely number of relevant acquisition targets is only one or two,

and this does happen, then other alternatives need to be evaluated as a fall-back.

At a public seminar I presented, one delegate asked, “How do I prioritize my

acquisition search because I have identified more than 600 relevant target compa-

nies?” I just managed not to laugh, but some delegates did.

When the number of targets is either very small or unworkably large, it is neces-

sary to review the search criteria. Ideally, there should be at least a handful of

targets but not more than, say, 50.



Write an acquisition profile to focus your acquisition search

An Acquisition Profile needs to be written, and authorized, before any search is

initiated. It will minimize abortive effort and accelerate your acquisition programme.

I was asked to review an acquisition search by the chief executive of a substan-

tial listed group because “our dedicated team has failed to find a suitable

acquisition after two and half years so they are clearly getting it wrong.”

Their brief was to acquire a leisure company, listed group, subsidiary or privately

owned, to become the cornerstone for a new profit stream. The team was invited

to be imaginative in their search.

I found the search work to have been done extremely well, despite the

ludicrously vague remit. Recommended targets were submitted in writing to a

committee made up of the group directors. To ensure a consensus, a target had

to receive unanimous agreement by the group directors. I asked them to humour

me by reviewing six companies again with me which seemed relevant. Each one

had been rejected by personal subjectivity. A caravan park operator was rejected

because one director said “I would never holiday in a caravan park!”

The outcome was that one of the six companies was acquired and proved to be

a successful new profit stream.

An Acquisition Profile should not exceed two pages, and it should address:

• market segments, products, services

• commercial rationale

• maximum cash available for acquisition

• maximum total purchase consideration

• minimum size

• minimum profitability

• management and management style

• location

• key requirements for success

• financial return to be achieved

Each of these items is described below to provide a basis for writing an Acqui-

sition Profile.



Market segments, products and services

Clarity is key. A vague description such as leisure or support services is a recipe

for abortive effort, because these are open to countless interpretations.

Conversely, a car park management company serving public sector clients such

as hospital trusts and leisure centres gives focus, and avoids the temptation to

acquire a company because it is up for sale.

Commercial rationale

This should spell out the key reasons for acquisition and, ideally, how the business

will be differentiated from competitors. For example, the financial squeeze on

hospital trusts and leisure centres means any extra sources of income are very

attractive. The market is growing rapidly and it could be offered to existing clients

for whom we provide other support services in the public sector. The business

model will be to charge a management fee and to have a profit sharing agree-

ment with each client.

Maximum cash available for acquisition

This should take into account any cash requirements of the existing business

and the likely needs of the acquisition over the next two years, which often tend

to be underestimated.

Maximum total purchase consideration

This should take into account any term loan, issue of loan stock or shares to

finance the purchase, and reflect the asset allocation by sector to be pursued

by the acquiring group.

Minimum size

The amount of management time to negotiate an acquisition and to integrate

it differs very little regardless of size. I strongly recommend one sizeable acqui-

sition, rather than a handful of smaller deals. Turnover and/or gross profit can

be used as an indication of size, as an alternative to profit before tax.



Minimum profitability

Acquiring a loss making company will be less costly than a profitable one, at

least in the amount of purchase consideration. The harsh truth, however, is that

some bargain acquisitions bought for just £1 and an assumption of liabilities

have proved to be disastrously expensive.

Key issues before buying a loss making or underperforming business include:

If it is to continue as a stand alone business, rather than be folded into an existing

operation, an experienced chief executive and financial director need to be injected

immediately to work full-time.

The causes of underperformance must be established before completing a deal,

and never assume that the reasons outlined by the vendors are accurate.

The action required to eliminate losses must be articulated pre-deal. Statements

of motherhood such as overhead reduction and increased selling prices are

dangerous. If people are to be made redundant, a provisional list needs to be

identified, and the implications of the Transfer of Undertakings and Protection

of Employees legislation must be taken into account. Any assumption of increased

selling prices should be based upon commercial due diligence, and not simply

a hunch.

Management and management style

Continuity of management and a compatible style are important issues, unless

the business is to be folded into an existing operation. In some sizeable private

companies, even minor decisions are made by the directors and substantial

decisions are based on instinct alone. The key is to sell the need for different

management disciplines and to avoid the loss of entrepreneurial flair.

Where a performance related deal is negotiated, it must be realized that the share-

holder directors will almost certainly leave as soon as the deferred purchase

consideration has been achieved. More importantly, if the directors realize that

they will not earn any more because performance targets will not be achieved,

do not be surprised if they decide to leave prematurely. From the outset make

plans for when the directors leave by having executive directors ready to assume

management control.



Key requirements for success

On countless occasions, an acquisitive client has presented me with an Acqui-

sition Profile with as many as 10 or 20 key requirements for success. In fact they

have defined the perfect company to acquire, which simply does not exist.

I believe there should be no more than two or three key requirements for success.

Furthermore, it may be that no company exists today in the market segment

with more than one or two key requirements for success. So be it, but the key

requirement for success is to be able to change and develop the company post-

acquisition into a successful business.

Financial return to be achieved

The financial return expected should be specified at the outset. Many groups

use a discounted rate of return calculated after corporation tax, typically calcu-

lated for a period of at least seven years. The question of valuation is addressed

in Chapter 5.

Discounted cash flow analysis is not a panacea which will ensure an ‘accurate’

valuation. In most sectors, forecasting more than two or three years ahead is

nothing more than guess work, because market and technological change are

likely to alter the playing field substantially. For example, it is not long ago that

the oil prices were forecast to reach $60 a barrel. Today prices are higher than

$70 a barrel. Furthermore any cost rationalization or unlocking of synergy is

likely to be realized within the first couple of years or so, or never achieved at

all!

So, unsophisticated though it is, I believe the benchmarks to measure acquisi-

tion success in financial terms is by what is achieved in the first two or three

years in terms of:

• sales

• % gross margin

• profit before tax

• cash generated or injected



Chapter 4Find relevant targets and woo vendors

A UK in-house search – initial stages

Be wary of using external advisers

An in-house UK search – main search

Don’t just contact vendors, woo them from the outset

The initial meeting with the vendors

The key meeting to obtain streetwise

information from the vendors

An overseas search


Chapter 4Find relevant targets and woo vendors

The vital ingredient for a successful acquisition programme is not the identifi-

cation of targets, but the ability to woo vendors. In my experience, both as an

executive and professional adviser, the most successful acquisitions have been

those where the company was not for sale until a persuasive approach was made.

Also, never forget that when a company is being marketed, the reasons for sale

outlined by the vendors may be plausible but are often not the key reasons and

are merely a smokescreen.

A UK in-house search – initial stages

For an acquisition search in an existing market segment it is possible that the

identity of every worthwhile target company is known. Even for an adjacent

market segment, however a systematic search may be essential.

Provided that one person is given accountability, with a deadline for comple-

tion, it is entirely possible to carry out an acquisition search in-house. Valuable

sources of information include:

• Market sector surveys which are published annually for a wide variety

of sectors, and cost typically between £250 and £500. Although compiled

from annual reports sent to Companies House, which means that the

figures are somewhat out of date, these are a highly cost effective means

of identifying the names of possibly relevant companies.

• Commission a sector survey to meet your needs. If no sector survey

is published, approach a debtor rating service and ask them to produce

a tailor-made list based on your criteria for:

– the standard industrial classification number for the segment you

wish to search

– a range of acceptable turnover

– minimum pre-tax profits.



The cost is likely to be similar to that of a published sector survey, or somewhat

higher depending upon the number of target companies.

Let there be no doubt, however, that the above approaches are simply quick, cheap

and ‘dirty’, in order to assess the likely number and names of target companies.

The next stage is to visit websites of the companies identified to assess whether

or not their business model fits your acquisition criteria, and only then to incur

the cost of obtaining a copy of the most recently filed and abbreviated Annual

Report for each company still included in the search.

One acquisition approach which is destined to fail, in my experience, is when

the chief executive announces to board members that it is their responsibility

to bring relevant target companies to the attention of the board. It will simply

be quickly ignored and forgotten.

I do not rule out, however, getting together a group of people with wide industry

experience from within the business to brainstorm possible targets.

The next step, however, should be to consider the use of external advisers before

proceeding with an in-house search.

Be wary of using external advisers

I do not reject using external advisers, but you need to be extremely wary of

the methods to be used and hard nosed about their rewards.

At the initial meeting with you, the external adviser should:

• Demonstrate their sector experience

• They may have virtually none, so they will be learning at your expense.

Ask them how many legally completed deals they have achieved in this,

or closely related sectors. What is their knowledge of recent deal activity

in the sector and prices paid? This is basic pre-meeting homework which

they should have done!

• Outline their search techniques

One corporate finance adviser told me they typically sent out up to

1,200 emails to prospective vendors (a really selective approach!) saying

they had been appointed by an un-named buyer.

4 FIND RELEVANT TARGETS AND WOO VENDORS


In addition, they emailed at least 75 intermediaries to ask if they were

acting for any relevant vendors. This can be effective because it will

identify companies already for sale. (No follow up was done whatso-

ever, and this was their search process.)

• Be ready to challenge your acquisition criteria.

If the external adviser is sufficiently knowledgeable or has done

adequate homework, they should be ready to challenge your acqui-

sition criteria to be:

– too broad to focus a search

– too narrow that barely any candidates exist

– in a sector which looks unattractive

– and be able to demonstrate their ability to open doors for you

The adviser should confirm they will telephone the decision-maker in target

companies to say that they are acting to acquire for an un-named (at this stage)

client and offer to meet prospective vendors to reveal the acquirers identity and

outline their rationale.

Establish the fees charged and exclusivity offered. You should reject a consul-

tancy approach.

Some search firms seek to simply provide you with a written report on each

relevant target company, and leave you to progress them, for a fixed fee reflecting

the time spent. The search adviser cannot lose and has no incentive whether

you acquire or not.

The search adviser should do comprehensive research and open doors for you,

as outlined above, for a fixed fee, which means they will make a loss unless you

legally complete a deal. I believe that £10,000, plus out of pocket expenses is a

reasonable reward for the work and 1% of the deal value, but only paid when

the purchase consideration is paid to the vendors by you, otherwise in an earn-

out you pay sizeable fees at legal completion for earn-out payments which are

never paid because of underperformance by the acquired company.

The question of exclusivity is one of vital protection for you. Some search advisers

may assume that target companies rejected by you or where your approach is

turned down by the vendors are fair game for them to be appointed to sell these

companies! Who knows whether you may want to acquire these companies in

a year from now or, indeed, whether or not the vendors will be ready to sell to

you by then. Do not deprive yourself of the opportunity.



An in-house UK search – main search

Meetings with prospective search advisers will help you to decide whether or

not to do an in-house search and, more importantly, you should gain some useful

tips to help you to carry out an in-house search effectively.

The initial stages of an in-house search described earlier in this chapter, means

that you have:

• identified the names of (possibly) relevant target companies, with their

last reported turnover, profit before tax and net tangible assets

• visited the websites of these companies to check the relevance of their

products, services, business model and locations to rule out unsuitable

companies

• obtained the most recent abbreviated Annual Report available from

Companies House, rather than the full report, to avoid unnecessary

expense

It must be recognized, however, that Annual Reports may be misleading for the

purpose of an acquisition search, because it may be that:

• private companies deliberately understate profits to minimize their

corporation tax liability

• subsidiaries of groups may understate their profits as a result of transfer

pricing or management charges applied by group

• businesses, even large ones, of a group operate as a trading division

and may not be captured by electronic searching

• a management buy-out company which may have profits depressed

by the interest cost from a large debt used to finance the purchase,

and would disappear as a result of an acquisition

The reality is that the only way you will obtain reliable information is direct from

the vendors, and this is why it is vital to woo them.

Another avenue to pursue at this stage is to contact selected corporate finance

advisers and business brokers in order to find out if they have been appointed

to sell companies which are relevant for you.

Middle-market corporate finance advisers sell companies primarily in the £5M

to £100M deal value range. These firms include the middle tier of accountancy

firms, outside of the Big 4, and independent corporate finance boutiques.



Business brokers handle deals mainly in the £2M to £10M deal value range, and

you should realize that they will expect you to pay them a finders fee for intro-

ducing a deal which you legally complete. They have standard fee scales, but

don’t just accept this and negotiate persistently.

Investment banks, even the smaller ones rarely get involved in deals less than

£100M in value and the larger ones could well focus only on £1 billion plus disposal

mandates.

Don’t just contact vendors, woo them from the outset

People are bombarded by so much email that a request to explore a mutual oppor-

tunity (unsaid, deliberately, for you to acquire them), may be ignored as another

junk email.

Curiously, today, the old fashioned letter has more impact because directors

receive relatively few of them. Many, many vendors, however, tell me they get

at least one every quarter and many are consigned to the waste paper basket.

Effective wooing of a prospective vendor needs to be done person-to-person.

Ideally you have met the person before and can arrange a lunch to explore

(unstated) mutual opportunities. Failing that, perhaps you know, or could find

someone, who could introduce you to the vendor and this will lead to a lunch.

Either way, towards the end of the lunch it would be reasonable to say “whenever

the time does come for you to think about a sale, we would be interested”. Then

listen to the response. If it is to rule out a sale for several years, make sure you

maintain contact, say, about quarterly because circumstances may and do change

unexpectedly.

If you do not know the vendor, or are unable to obtain an introduction via someone

else, a telephone call to arrange a lunch to explore ‘mutual opportunities’ needs

to be made.

External advisers, particularly corporate finance people, have in-built advan-

tages. Firstly, they have plenty of experience of making these calls. Secondly,

they are able to say that they are carrying out a tailor-made search exclusively

for a client and research has identified the vendors as a relevant target. Usually,

the acquirer will not want to reveal their identity at this stage, and the adviser

will offer to visit the prospective vendors, name the prospective acquirer, explain



the commercial rationale and describe the deal history of the vendors. The advisers

must sell the acquirer as an attractive partner offering a compatible deal from

the outset.

Remember there are no silver medals for acquirers!

Either the adviser persuades the vendor to meet the acquirer, and ideally the

adviser will be present to introduce people and to make sure the first meeting

is effective, or, there simply will be no deal in the foreseeable future.

The initial meeting with the vendors

This assumes that the vendors have indicated a willingness to at least have one

exploratory meeting.

In advance, the acquirer should offer a confidentiality agreement to protect the

vendor or be prepared to sign one provided by the vendor, which can prove

tricky. Some multinational corporations insist that their legal department approves

and negotiates or insists on required changes! This is potentially a huge turn-

off to a prospective vendor and must not be allowed to happen. At this stage a

confidentiality agreement should be designed to be a comfort factor for the vendor.

If a deal progresses, a more suitable and wider ranging confidentiality agree-

ment can be signed.

The venue of the first meeting is important. Vendors should reject a meeting

on their premises, because it is possible that a member of staff may recognize

the acquirer from photos in the trade press, or having worked for the acquirer

previously, and speculation will be rife.

It should be a neutral venue, either at your advisers offices or in an hotel meeting

room convenient for the vendors.

Numbers attending should be small to underline confidentiality. It is vital that

the acquirer is represented by a key decision-maker, otherwise this will unsettle

the vendor, and ideally only one other person.

The purpose of this meeting is to woo the vendors and to convince them to agree

to a meeting to share more detailed information with each other.



At this stage, the acquirer must demonstrably give more information than the

vendor, subject to stock exchange limitations. A written agenda would be too

formal, but the following should be covered:

• Understand the vendors personal aspirations, timescale for leaving

the business and particular concerns about selling.

• Outline the business rationale, future development plans and

management style of the acquirer.

• Name any acquisitions made in recent years and how these have turned

out. Ideally, the acquirer would extend an invitation, to be taken up

as and when appropriate, to meet recently acquired companies.

• Give comfort, but only if appropriate, that the current thinking is to

retain the present business locations, senior management team and

the staff, whilst adding tactfully that the acquirer knows relatively little

about the inner workings of the target company.

• Discuss current year performance to date in outline and the forecast

result for the current year. The acquirer may be happy to offer a printout

of the management accounts summary pages, but it should be

assumed the prospective vendor will only wish to talk about current

performance at this stage.

• Ask the vendor, if the meeting is going well, if they are happy to arrange

a further meeting to exchange more information which will allow you

to outline an offer and a timescale. If the vendors agree, they should

be given time to appoint advisers and have them present. If the vendors

are not ready to agree, however, you need to establish their specific

concerns and gently reassure them during the meeting. Failure to get

agreement to another meeting cannot be allowed to put a deal in

abeyance. If the vendor has legitimate concerns, such as consulting

other shareholders or family members, then this must be allowed to

happen but follow up is essential.

Successful acquirers must not be deterred!



The key meeting to obtain streetwiseinformation from the vendors

The decision-maker of the acquirer should have an informal meeting with the

vendor first, in order to outline the information to be collated, to give the vendors

time to prepare and, if necessary, cajole and negotiate to obtain sufficient infor-

mation to provide an adequate basis for valuation in order to make an

indicative offer to the vendors.

Failure to have this preliminary meeting may well reduce the key information

gathering meeting to a shambles. The acquirer should provide an in-house team

for the information gathering meeting. The time and place for due diligence by

external advisers is only when, and if, Heads of Agreement have been signed.

The objective is not simply to ‘audit’ or verify past performance, or even the

current year to date. The aim must be to assess both the short and medium-

term future prospects as well. The art is that of prospecting for and assessing

the quality of the gold ore still in the ground, not just counting gold bars in the

vaults.

The essence of a successful initial investigation of an acquisition target is to identify

the vital factors for success in the business concerned and to examine these in

some depth.

On the negative side, one should be looking out for vulnerable features of the

business and assessing whether or not the performance has reached a plateau

or is about to decline. On the positive side, equal importance should be given

to identifying latent opportunities for profitable development and any under-

valued assets.

Another important factor to assess during the investigation is whether or not

the management styles of the companies are compatible. For example, a require-

ment to operate complex and rigorous financial planning control procedures

may be unrealistic to people used to working in an informal way with only

rudimentary budgetary control.

Information obtained should not be restricted to financial data. The scope of

the investigation must be wide enough to give an overall picture of the

business, covering marketing, sales, research and development, operations,

administration, human resources and staff relations.

The investigation should produce information sufficient to enable future profit

and cash flow projections to become a basis for deciding the value of the company



to the purchaser. Also, an assessment of the present balance sheet worth of the

company needs to be made.

The initial investigation should only be regarded as complete when one can

comfortably make a firm recommendation either not to proceed further or to

value the business and to formulate an offer.

Formal profit and cash flow projections for more than the current year are

uncommon in private companies. It may be appropriate to ask the directors to

construct a profit forecast for the next financial year and to give broad sales

projections for the following two or three years. The information and assump-

tions used as the basis for these forecasts must be known. Then the team should

prepare their own profit and cash flow forecasts off-site, reflecting their own

assumptions and the impact of any changes to be introduced under new owner-

ship.

Some acquirers mistakenly challenge sales and profit projections made by the

vendors, robustly to say the least, and seek to persuade them to be reduced.

This will only create ill-will, the vendors are unlikely to collapse on the key issue

for valuing the business. It is much more appropriate for the investigating team

to say they feel the projections are somewhat over-optimistic, outlining their

reasons, and that they will produce their own forward projections on which a

valuation and indicative offer will be based.

An overseas search

Firstly, take a vital reality check! Overseas acquisitions are the riskiest of all, so

be sure you are equipped to manage an overseas acquisition before you

commence a search.

The risk increases as you move down the following list:

• a bolt-on in the same market segment for an existing subsidiary in the

country

• an acquisition in the same market segment where you have your own

sales office, not merely a sales agent

• an acquisition which is diversification from you existing subsidiary in

the country



AND, THE MAXIMUM RISK OF ALL:

• any acquisition in a country where you do not have an existing business.

It is akin to knowingly trying to walk on water!

I do not believe that it is possible to carry out an effective overseas acquisition

search on a cross-border basis, in-house. It requires, preferably a suitable execu-

tive already working in the country, or someone to be transferred for at least

six months – but this is definitely second best.

Most companies, with good reason, use corporate finance advisers or a specialist

search company within the country. Talk to UK firms, which tend to be part of

global networks, or use the internet to identify prospective external help.

It is necessary to visit prospective search firms to assess their suitability before

appointing one. Your approach to these meetings should be similar to that

described earlier in this chapter for selecting UK search advisers.

Some overseas search advisers take a really opportunistic approach, namely that

as soon as you reject a target company they can either offer it to other clients

or pursue the company to be appointed to sell it.

Another trap to beware of is the ‘quarterly retainer’, rather than an acquisition

search. You are charged a set quarterly fee in exchange for the search firm

bringing to your attention any opportunities they learn about from their contacts;

and charge you a scale fee on completion which is unlikely to happen. I recom-

mend you run the other way.

I am categorically not against overseas acquisitions, but my successful experi-

ence as a principal and an adviser was based upon the watchwords of realism,

caution and rigour.



Chapter 5Use commercial common sense tovalue a business and make an offer

Adjusted profit history and forecasts are vital

Quantify major cost rationalization opportunities

Calculate the adjusted net assets

Use your own adjusted profits for valuation

Structure the offer to reflect vulnerabilities

Discuss your offer face-to-face with the vendors


Chapter 5Use commercial common sense tovalue a business and make an offer

Arguably, the financial analysis techniques relevant for valuing a business are

the same for buyers and sellers. This does not mean, however, that there is one

value for a business as a going concern. Buyers and sellers should have different

valuations because their assumptions should be different.

Before translating a valuation into an offer, the acquirer should take into account:

• How long have the vendors been trying to sell or actively market the

business?

• Has a previous deal fallen over? This may well have been (unsaid by

the vendors) because of unsatisfactory due diligence.

• Are there pressing personal issues prompting a sale such as terminal

illness or recent divorce?

• Are the vendors clearly wanting to retire as soon as possible

• Which other companies are likely to bid, and do they have a reason

to bid high? This does not necessarily mean you should follow suit.

• Is there a foreseeable breaching of overdraft limits, requiring personal

guarantees, or bank covenants or, worse still, administration?

• Is the business demonstrably in decline, and the vendors are unable

to turn it round?

Adjusted profit history and forecasts are vital

The cornerstone of a valuation by an acquirer should be based on the profit history

and forecasts, reflecting the way the acquirer will manage the business.

You may feel that profit history is like attempting to drive a car by using the

rear view mirror. Not so. Your discussions with the vendors may reveal that the

sales and profits of the previous two years were boosted by a one-off event. For

example, a change in tax rules affecting pension investments. Your aim should



be to create a realistic picture for the three previous years, the current year, and

the next two.

Vendors and their advisers know only too well that adjusted profits provide them

with an opportunity to ‘increase’ the valuation base. Consequently, it is

commonplace for the acquirer to be presented with a written adjusted profit

and loss history and forecasts at the outset.

From the vendor’s standpoint it is worth adjusting profits for the previous three

years if this will help to establish a record of rising profits. One-off events which

may have significantly reduced profits in a year include:

• lump sum pension contributions from directors

• the start-up costs associated with entering an overseas market

• the closure of premises or the termination of a product

• the costs arising from major litigation

• significant redundancy costs

• the costs of relocating a factory, warehouse or office

• a large bad debt as a result of a major customer going into liquidation

• a strike affecting deliveries from a key supplier

• excessive personal expenses which will cease immediately post sale

It is quite possible that a prospective purchaser will reject some adjustments to

profit, but at least the vendor has set out an arguably valid profit history.

The acquirer should be ready, in a non-confrontational way, to question the

relevance and the amounts put forward. Some items may be a definite try-on.

Additionally there may be other factors which will enhance profits for the new

owners, such as:

• the directors being required to accept a reasonable executive salary

after the sale, compared with the substantial rewards enjoyed as owners

and directors

• the intention that a director will retire upon the sale of the business

and will not need to be replaced, or only by a lower cost executive

• the savings arising from the termination of relatives working for the

business at inflated salaries

• the benefits to be gained from recently taken action such as a price

increase, the elimination of a loss making activity and so on

5 USE COMMERCIAL COMMON SENSE TO VALUE A BUSINESS AND MAKE AN OFFER


In the case of the disposal of a division or subsidiary, the vendors will adjust

the profits by ‘adding back’ charges allocated by the present group which will

cease following a disposal. These include a wide range of possible allocated costs

such as:

• a group management charge based on a proportion of central staff

costs

• a percentage levy based on sales value for group expenditure, such

as research and development or public relations

• service charges for the use of central departments such as information

technology, payroll, pension administration and so on

Typical additional costs which the acquirer must take into account include:

• the appointment of a qualified financial controller to replace an

unqualified book-keeper

• the need for increased insurance cover

• increasing some salaries to avoid unacceptable differentials compared

with similar staff already employed within the group

• additional pension contributions arising from employees joining the

group pension scheme

As a result of the above, the acquirer should produce his own adjusted profit

history, current year forecast and future projections.

Sometimes the acquirer sets out to justify a higher valuation by including profit

opportunities which they may be able to unlock but the vendor cannot.

Beware! This means you risk paying for the benefits you hope to unlock. These

should be calculated separately, and as a last resort some of this value may be

used to make an increased offer.

Profit opportunities which may arise include:

• purchase cost savings as a result of increased purchasing power

• cross selling the products and services of the acquired company to

existing group customers, and vice versa, both at home and overseas

• the rationalization of premises and overhead costs

As outlined earlier, and well worth repeating, the reality is that unlocking synergy

often proves harder than sighting the Loch Ness monster on a particularly dark

and foggy night!



It is simply not enough to use a percentage saving on purchasing across the

board or to include a lump sum for premises and overhead cost savings. Rigour

is essential. For example, people savings must be based on identified jobs which

can be eliminated. Also, the one-off cost of termination must be taken into account.

Quantify major cost rationalization opportunities

Some acquisitions produce substantial cost rationalization opportunities for

the purchaser. Consider a private contract caterer which operates in a local

geographic area and enjoys a high market share. A nationwide acquirer would

be able to virtually eliminate the directors, head office staff and costs by folding

the business under the existing regional management structure. Conse-

quently, the rule of thumb in the market sector is to value businesses on a multiple

of gross profit. In these circumstances, it is unlikely that an overseas acquirer

wishing to enter the market could match the price because there would not be

similar overhead savings.

When a multiple of gross profit is used to value a business, however, any incre-

mental overhead costs required by the acquirer should be taken into account.

For example, retaining two sales executives or needing to recruit another assis-

tant accountant.

Also, there will be significant one-off costs including:

• termination payments to staff

• new livery on vehicles

• new stationery

• outstanding liabilities on a property leasehold

• the realizable value, costs and timescale for selling freehold premises

• equipment hire liabilities

Strategic rarity or significance value must be taken into account

Rarity value is real, strategic significance may be subjective.

A scarcity of acquisition targets becomes rarity when there is only one attrac-

tive company available to acquire in a country in a particular market segment.

Recently, US medical and orthopaedic product companies have been keen to

acquire in the UK and Ireland, but the lack of private companies which are suitable



acquisition targets means that scarcity is rapidly becoming rarity value. In such

a situation, competitive bidding may deliver an outstanding deal for vendors.

Strategic significance is sometimes used to justify paying an excessive price for

an acquisition, despite the fact that the acquirer cannot outline the eventual impact

on sales, profit and cash flow generation to justify the offer.

I believe there needs to be both strategic significance and an adequate finan-

cial return. For example, if a prospective acquirer has failed to penetrate a major

supermarket chain by organic growth, then an acquisition makes sense but should

be valued on the financial fundamentals of the acquisition.

Sometimes, stock market listed companies feel themselves to be under pressure

to make an acquisition, either to diversify into more attractive market sectors

or to reduce their own vulnerability to acquisition. If they believe this to be the

case, whether it is a correct analysis or not, it is likely to encourage them to pay

a somewhat more generous price as a result.

Calculate the adjusted net assets

Profit and cash flow generation should be the basis of valuation for the acquirer.

If the balance sheet is excessive by comparison, the vendors should be encour-

aged to retain the freehold and to offer the acquirer, say, a three year lease with

an option to extend at an agreed cost which should be reflected in future profit

projections.

It is useful, however, for the acquirer to calculate an adjusted net tangible asset

value expected at legal completion. This should reflect the treatment of freeholds

and any debt to remain on the balance sheet at legal completion.

Many service companies have net tangible assets of less than 20% of the total

purchase consideration an acquirer is willing to pay, and in some cases it will

be below 5%. This should be sobering to prospective acquirers, and cause them

to insist on an earn-out deal where some of the purchase consideration is not

only deferred but is dependent on delivering increased profits during, say, the

next two financial years.



Use your own adjusted profits for valuation

You may be thinking, surely future incremental cash flow generation evaluated

on a discounted cash flow basis is widely accepted as a powerful technique

for capital expenditure projects, including acquisition. The purist in me agrees

with you, but the brutal reality is that forecasting sales, profits and cash flow

generation beyond two years post-acquisition is pure guesswork in most market

segments.

Arguably, discounted cash flow analysis should be carried out over at least a

seven year period and an assessment needs to be made of the realizable terminal

value of the acquisition.

The private equity players, previously often known as venture capitalists, have

a streetwise approach to valuation and there are features which corporate

acquirers need to know about.

Private equity houses usually make an offer based on a debt free and cash free

basis at legal completion, which simplifies matters.

Their valuation is based on EBITDA, defined as:

• Earnings – i.e. profit

• Before

• Interest – because this ‘disappears’ on a debt free and cash free basis

• Taxation

• Depreciation

• and Amortization

They assume that EBITDA is a sufficiently close approximation to net cash flow

generated. Their valuation will be based on an exit, assumed to be on a cash

basis payable at legal completion, within a maximum of five years. Their aim is

to seek a pre-tax internal rate of return of 30% to 35% compound per annum,

taking into account any dividend payments as well as the sale proceeds.

As they would prefer to exit within 3 years, because this is likely to yield the

maximum compound annual rate of return, they will check this out as well.



Even today, however, a surprising proportion of listed companies use a simple

price earnings approach to valuing a target company. This involves:

• using the adjusted pre-tax profits of the vendor for the previous financial

year

• deducting a full rate of corporation tax, even if the target company pays

a lower rate, to calculate the earnings, which is the profit after tax

• selecting a relevant price earnings ratio by examining the P.E. ratio

of comparable companies listed in the major newspapers

• deducting about 33% from the multiple you select to reflect the fact that

unquoted companies exits are typically discounted by this amount.

For example:

£’000

Adjusted profit before tax of target company

for previous financial year £1,200

Assume 30% corporation tax to be deducted £(360)

Earnings, i.e. profit after tax £840

Average price earnings ratios of relevant listed companies 15.0

Deduct 33% to reflect unquoted exit values (5.0)

Valuation multiple to be used 10.00

Valuation derived is £840,000 x 10 = £8.4 million

Corporate acquirers should never rely on a single valuation technique, so there

is merit in using a DCF approach based on EBITDA and the internal rate of return

required by the group to arrive at alternative valuations.

Other issues to be taken into account are:

• Using on-line services, obtain details of deals done in the UK during

the previous two years in the market segment. Recognize that the on-

line service is unlikely to have access to adjusted profits for the vendor

and this could inflate the valuation multiples given.

• Although Price Earnings ratios for listed companies are calculated

arithmetically on the previous year profit after tax, the share price is

likely to reflect future profit performance. So it is useful to do another

valuation of the target company based on current year adjusted profits.



• Which other corporate acquirers are you likely to be bidding against

and private equity houses. Use this information to assess other likely

bids, but not to justify your bidding higher in order ‘to win’.

Structure the offer to reflect vulnerabilities

When you have arrived at your maximum deal value based on the above assess-

ment, you need to decide the deal structure and your opening offer.

If there are demonstrable vulnerabilities within the business, you should insist

upon an earn-out deal at the outset. Without agreeing the deal structure in outline

with the vendors, any seeming progress is likely to come unstuck.

Vulnerabilities which may require protecting against include:

• the renewal of major medium-term supply contracts which must be

renegotiated within the next two years

• the risk that a group of key fee earners will leave to do their own start-

up or be offered a better deal by a competitor

• major technological developments or legislative charges which are likely

to or could happen

• sales could be seriously affected by an oil crisis arising from armed

conflict

In these circumstances, the initial offer payable at legal completion should fairly,

but not over-generously, reflect the current value of the business. Some

acquirers lose the deal at this stage, irretrievably, by making too low an offer

which the vendors dismiss out of hand.

It is unlikely that the vendors will agree to an earn-out of more than two finan-

cial years, and the reality is that a longer period may become problematic for

the acquirer because it could hamper necessary strategic change within the

business.



Discuss your offer face-to-face with the vendors

Do not be tempted to make a written offer to the vendors without a prelimi-

nary meeting to agree deal structure, including any requirement on your part

for an earn-out deal, an indicative payment at legal completion and the overall

deal value they could achieve from an earn-out.

Vendors quite rightly often reject purchase consideration payable in ordinary

shares of a listed acquirer, so you will need to approach this cautiously and flexibly,

or better still, not at all.

Before you send an offer letter, you need to be confident that the deal structure

has been agreed in principle, you are aware of any deal breaker notified by the

vendors, and that your letter will not contain any nasty surprises which you should

have discussed with the vendors.

Within 48 hours of the vendors receiving your offer letter, telephone them to

find out if anything needs clarification. If you simply sit back and wait for them

to respond they may have agreed a deal with someone else by the time you contact

them.



Chapter 6Negotiate the deal and sign Heads of Agreement

Negotiate the Heads of Agreement

Earn-out deals need defining

Warranties and indemnities need to be negotiated

Fix the maximum liability of the vendors

Joint and several liability for vendors

Agree the basis to trigger a warranty claim against the vendors


Chapter 6Negotiate the deal and sign Heads of Agreement

It is virtually certain that you will need another face-to-face meeting with the

vendors following your written offer letter, as they will be keen to negotiate an

improvement and obtain clarification.

The purpose of this meeting should be to negotiate:

• any amendments to the original offer and clarification of specific points

in the letter

• any changes to the form of purchase consideration requested by the

vendors

• the management continuity you require, or the departure of any

shareholders you want to happen, without any termination payments

• how any potential deal breaker issues will be resolved

• a date for the meeting to draft the Heads of Agreement for signing

and the granting of exclusivity immediately afterwards, which should

allow about eight weeks for due diligence and the legal work prior to

completion.


The effective negotiation of Heads of Agreement needs a structured and rigorous

approach. Firstly, it is essential to understand what the Heads of Agreement

are, and what they are not. The Heads of Agreement should be a more detailed

description of the deal and written in commercial language. It is typically about

three to six pages long, and serves as a briefing document for each side to instruct

their lawyers.

The Heads of Agreement are categorically not an obligation on either side to

legally complete the deal. Importantly, if due diligence reveals unexpected

problems, or their magnitude, the acquirer has every right to renegotiate the

deal or to withdraw.



Very few clauses should be binding. The most common one is that neither side

may announce the deal without the express permission of the other. Some vendors

may seek protection that the value of the deal will not be disclosed to the press,

because they do not wish family, friends and neighbours to know how rich they

have become. Yes, this does get raised.

Acquirers should reject any request for a cost indemnity for the vendors if the

acquirer withdraws. I have always advised vendors that it is an unrealistic request,

because the acquirer will insist on a reciprocal indemnity and attach onerous

conditions to any vendor indemnity so that it is virtually unenforceable.

It is essential that the Heads of Agreement are framed in a tax efficient way and

in accordance with company and employment law, such as TUPE (Transfer of

Undertakings, Protection of Employees) legislation. A corporate finance adviser,

or a suitably experienced in-house deal-maker should be able to ensure this.

I strongly recommend that you agree with the vendors that neither side will bring

a solicitor to the Heads of Agreement meeting. It is easy for the goodwill between

both sides to be undermined by lawyers prematurely getting involved in techni-

calities which should be addressed later. Do tell vendors that, if they wish, their

solicitors can be asked to give the thumbs up before the Heads of Agreement

are signed.

Send either draft Heads of Agreement or a suggested agenda.

Some acquirers, encouraged by their corporate finance advisers, send a draft

Heads of Agreement prior to the meeting to negotiate and agree them. This could

prove to be one step forward and two steps back because the vendors inter-

pret this approach as unduly presumptuous.

My preference is to send a draft agenda ahead of the meeting and to invite the

vendors to add any items they wish to be added. This means the meeting should

start smoothly because the agenda has already been agreed, and the acquirer

should remind the vendors that the mutual expectation is to sign Heads of Agree-

ment within two working days and exclusivity be granted.

In addition, to confirm the offer, the agenda needs to include:

• Earn-out arrangements

• Warranties and indemnities

• Assets to be excluded. It may be agreed that certain freehold premises

are to be excluded and a medium-term lease will need to be negotiated

in terms of the duration, initial rental and rent review dates. In the case

6 NEGOTIATE THE DEAL AND SIGN HEADS OF AGREEMENT


of a private company, assets for personal use such as cars or a boat

may be excluded and a price will need to be agreed for the individuals

to purchase them. The written down book price is often agreed as the

value and this may well be lower than the market value.

• Form of purchase consideration. If shares of the acquirer form part

of the purchase consideration, the value of the shares will need to be

defined. To guard against a sudden increase in the share price

working against the vendors, it may be necessary to accept that the

value of the shares is the lower of the mid-price at the close of the day

immediately prior to legal completion and the average share price for

the previous 20 working days. When the acquirer requires some of

the consideration to be in the form of loan notes, then the interest rate

and payment dates, the redemption arrangements and bank guarantee

will need to be negotiated.

• Warranted net assets at completion. It is commonplace for the

acquirer to seek a minimum net asset value at legal completion, with

a cash adjustment to make up any shortfall. An issue which may affect

the net asset figure to be warranted is the amount of working capital

to meet the short-term needs of the business and this will need to be

negotiated.

• Completion accounts. The vendor may be asked to produce a balance

sheet at the completion date to verify that the net assets acquired by

the purchaser are in accordance with Heads of Agreement.

• Release of personal guarantees. The shareholders of a private

company may have given personal guarantees under a leasehold

agreement or for a bank loan. If so, the vendors need to realize that

the acquirer cannot undertake to release them from their guarantees

at completion. Release rests with the holder of the guarantee and the

acquirer should promise to use its best endeavours, a phrase which

has legal meaning, to procure a release. Normally, there should not

be any problems because the financial resources of the acquirer should

be more acceptable, and any loans may be repaid at completion or

shortly afterwards.

• Job titles and service contracts. Continuing directors will usually be

required to sign new service agreements with salary, bonuses,

pension contributions and fringe benefits in line with the acquirer’s

normal policy; job titles may be changed as well. If there is no earn-



out deal, then the notice period will be the normal one used by the

acquirer, but when there is an earn-out the continuing directors need

to ensure that their service contracts extend for the duration of the

earn-out agreement, plus an additional three or four months to allow

for the final accounts to be prepared, before the standard notice period

comes into effect.

• Any consultancy agreements. These are sometimes encountered

following the sale of a private company. The acquirer may want to have

access to a ‘retiring’ director to make use of personal contacts or

technical know-how for a limited period. If so, the reward must be

commensurate with the amount of time spent.

• Restrictive covenants. It is becoming increasingly difficult to enforce

restrictive covenants in employee service contracts, but vendors should

assume that restrictive covenants in the Share Purchase and Sale

Agreement will be enforced. The covenants are likely to cover any

competing business serving the same geographical area typically for

a three-year period, although it may be necessary to negotiate this down

to two years.

• Pensions. It is essential that the acquirer is aware of any shortfall in

the pension fund compared to the liabilities and has reflected this in

the offer. Equally, the proposed pension arrangements post legal

completion should be outlined and be compliant with existing

regulations. Also, the acquirer must assess whether or not the

reaction of staff will be hostile.

• Due diligence. The acquirer needs to outline the scope, extent and terms

of reference for due diligence. It may require persuasion and

negotiation for the vendors to agree, but it needs doing now and cannot

be left until due diligence commences and disagreement arises.

• Timetable to legal completion. It is quite inadequate to agree that

“because Christmas is nine weeks away, let’s agree we will target legal

completion for the week before Christmas”. This is nothing less than

shooting in the dark; the acquirer needs a detailed timetable in order

to know promptly when the vendors are allowing the timetable to slip.

The typical steps in a time table are:

Heads of Agreement signed Week 1

Draft Share Purchase and Sale Agreement received Week 2

Due diligence commences Week 2



Due diligence investigation completed Week 5

Date reserved to meet to finalize the Share Purchase

and Sale Agreement Week 6

Formal executive or investment committee approval Week 7

Disclosure statement submitted to the vendors Week 8

Legal completion Week 8

The number of weeks required will vary according to the size and complexity

of the deal. In a straightforward case, due diligence may require only two weeks,

but in a complex acquisition it could take five or six weeks, especially if the initial

work prompts the need for supplementary investigation.

When a circular to shareholders is needed by a stock market listed company,

either to obtain the requisite approval or to have a rights issue of shares, additional

steps and time will need to be included in the timetable.

Earn-out deals need defining

Earn-out deals occur in about one third of all private company sales to a corpo-

rate buyer in the UK, but rarely feature in the sale of a subsidiary. Vendors of

private companies are understandably nervous about earn-out deals because

part of the purchase consideration is not only deferred but contingent upon

achieving agreed profit targets for usually the first two years post-acquisition.

In addition to the inevitable trading uncertainties, there is always the concern

that the acquirer may hamper profit achievement.

Acquirers should insist upon or seek an earn-out deal if:

• the company is particularly dependent upon issues such as successfully

negotiating a major five-year contract renewal in, say, a year’s time

with a major customer, or a critically important sole supplier

• profits are forecast to grow dramatically

• the continued commitment of directors is demonstrably important; or

• the net tangible asset backing is extremely low compared with the

purchase price

Once legal completion occurs the company will be expected to adopt the acquirer’s

accounting policies. There have been a few exceptions, however, because of partic-

ular circumstances whereby the company has been allowed to continue with



existing accounting policies purely for earn-out calculation purposes and the

figures have been converted afterwards.

To avoid argument and even litigation in due course, it is essential that profit is

defined precisely for earn-out purposes. Typically the definition should be based

upon:

• the acquirer’s accounting policies

• profit before tax arising from the ordinary course of business – which

would rule out a capital gain on disposal of a freehold property and

similar exceptional items

• an agreed and specified annual charge for services the acquirer will

provide such as audit, tax advice, legal, payroll and pension

administration, etc

• a specific ‘rate card’ for group services which the company intends

to use when required – examples could include rent of additional space,

transport, etc

• an interest rate, possibly linked to underlying base rates, for cash

borrowed from the group to finance expansion

• a notional interest credit for any interest earned as a result of the group

placing surplus cash on overnight or short-term deposit

• agreed rules for profit sharing when carrying out business with other

group subsidiaries

The profit thresholds set for earn-out payments to be made must be negotiated

using the above definition of profit. There may be other circumstances, however,

which should be taken into account when agreeing the profit thresholds, for

example if:

• the acquirer insists upon appointing, say, a qualified accountant as

finance director in addition to the existing accounting staff, then the

total cost of employment should be deducted from the threshold

• the acquirer wishes the company to launch sales offices in Europe and

the likelihood is that this will detract from the ability to maximize earn-

out payments, then it should be negotiated that all income and expenses

arising are excluded for earn-out purposes



Warranties and indemnities need to be negotiated

Cost indemnities are a binding obligation on the vendors to reimburse the acquirer

for liabilities which relate to the period up to legal completion date. The most

onerous indemnities relate to taxation matters and the buyers lawyers will usually

seek protection for seven years – because the Inland Revenue has a period of

six years to claim additional tax payments. The vendors cannot get out of a tax

obligation by claiming that both they and their auditors were completely unaware

of the situation. Ignorance is categorically not a defence.

A warranty puts the burden of proof on the acquirer to demonstrate that they

would have reduced the purchase price, and most importantly to quantify the

amount, had they known that the company was in breach of a warranty at legal

completion. The buyer may ask for a three-year warranty period, but it may be

necessary to accept a two year period.

Fix the maximum liability of the vendors

Acquirers, egged on by their solicitors, often take a hard line and state that the

maximum liability under indemnities and warranties should be the total

purchase consideration, regardless of whether it is paid in cash, loan notes or

shares.

I believe this is unrealistic. The vendors risk repaying the entire purchase consid-

eration even though they have a capital gains tax liability as well. Further, you

may be under pressure to reduce the maximum liability further by deducting

the market value of any freehold property owned by the company and which

is demonstrably saleable.

Joint and several liability for vendors

It is entirely reasonable for the acquirer to demand joint and several liability

among the individual shareholders of a private company, which means that if

any shareholder does not pay his/her share of the liability then the acquirer can

pursue the other shareholders. The liability of each shareholder can be capped

by all of the shareholders entering into a deed of undertaking to pay the requi-

site share of liability claims.



Agree the basis to trigger a warranty claim against the vendors

This subject often generates a lot of emotion and yet it can be dealt with easily

and quickly.

Acquirers are well aware of the management time and professional fees involved

in pursuing a warranty claim if litigation is required. Consequently, they should

readily agree that the minimum aggregate claim, to be pursued is £50,000.

Many acquirers will probably accept that only individual warranty claims of at

least £5,000 will qualify toward the minimum aggregate sum of £50,000 or any

higher figure which is agreed.

In stark contrast, however, cost indemnities give the acquirer the legal right for

full compensation.

Any purchase consideration to be held in escrow

Some acquirers will seek to have a sum of money deposited in an escrow account,

held by the two firms of lawyers, to ensure that cash is available to meet warranty

and indemnity claims. Although the vendor will be credited with the interest

received, they will be deprived of the use of the money held in escrow.

If an acquirer is insistent on holding money in an escrow account, the time to

raise and negotiate it is during the Heads of Agreement meeting. Some acquirers

deliberately stay silent on this point and simply include the requirement for an

escrow account in the first draft of the Share Purchase and Sale Agreement.

This is likely to prompt a hostile reaction from the vendors. Their response will

be to reject it because the issue should have been raised at the Heads of Agree-

ment meeting. In one case, the vendors terminated the sale to a listed group

because they regarded the unexpected requirement for a 25% retention

included in the Share Purchase and Sale Agreement to be a fundamental act of

bad faith.



Chapter 7Steer the deal safely to legalcompletion

Effective commercial due diligence is vital

Environmental due diligence needs to be done on every deal

Financial due diligence must include profit forecasts

and the order book

Pension due diligence

Legal due diligence should include contractual issues

and regulatory compliance

Assess the disclosure statement by the vendor

and negotiate changes

Prepare to announce the deal internally and externally


Chapter 7Steer the deal safely to legalcompletion

Attractive deals sometimes fail to complete after signed Heads of Agreement

because no one is accountable for steering the deal safely to legal completion.

Either your corporate finance adviser or an in-house executive must have personal

accountability to ensure that legal completion is achieved within the agreed

timetable, unless there is good cause.

Effective due diligence has to be carried out and the legal work completed. Some

large accounting firms offer a one-stop-shop service for all the due diligence

required. Accountancy firms are demonstrably equipped to handle financial and

tax due diligence, provided they have specialist teams carrying out this work

on a full-time basis. Commercial environmental and pensions due diligence are

at least equally important, however, and you need to be satisfied that their individ-

uals have the depth of experience required, otherwise appoint specialist firms.

Effective commercial due diligence is vital

Some corporate acquirers regard commercial due diligence as an optional extra,

which is nonsense and dangerous. Private equity firms insist on commercial due

diligence and they are right to do so. It is the underlying commercial well-being

of the target company which will determine the short to medium-term success

of the acquisition.

The key requirement for a firm adequately equipped to carry out the work for

you is that they will field a team with personal experience of the market segments

and countries involved. Never let advisers learn at your expense.

The purpose of commercial due diligence is to answer questions such as:

• Which companies are the market leaders, and what are their business

models and competitive advantages?

• What are the underlying market, technological, legislative and social

changes affecting the sector and their likely impact?



• Which overseas competitors are emerging and what do they offer?

• Is over or under-supply anticipated in the short to medium-term in

the sector, and how are companies likely to react?

• Which competitors of a similar size to the target company are

succeeding and why? And which are failing?

• How do customers, former customers and non-customers regard the

target company?

• How is the target company rated as an employer?

Clearly, this is highly skilled work which requires contact with relevant compa-

nies to gain the necessary information, but without remotely revealing that the

target company is for sale.

Environmental due diligence needs to be done on every deal

It would be folly to assume that because the target company occupies new offices

on an attractive site there can be no environmental risks. It is the previous use

of the site which determines whether or not there is an environmental liability.

You may be quite happy not to worry about environmental issues on acquisi-

tion, but the real probability is that the next acquirer will and this will cost you

money should you wish to sell the business or relocate to another site.

Over the years there has been growing environmental legislation which

companies must follow. It is essential that a check is carried out to ensure that

all compliance work has been carried out, proper records kept and action taken

as necessary.

Previous usage of the land may well give strong indications of potential site

damage. Oil storage suggests leaks, which may need expensive clean up work.

On one site, routine testing revealed that animal remains had been buried in

shallow pits and were regarded as an environmental hazard. The clean up work

cost a six figure sum, but at least the acquirer had the upper hand to negotiate

an adjustment to the deal value.

Without question, environmental due diligence is specialist work and requires

appropriate expertise. The cost should be regarded as an insurance to protect

against discovering an expensive liability later.

7 STEER THE DEAL SAFELY TO LEGAL COMPLETION


Financial due diligence must include profitforecasts and the order book

It is totally inadequate for the financial due diligence merely to adopt an audit

approach up to the date of legal completion, even if the purchase considera-

tion is being paid in full on that date.

In these circumstances, some vendors react emotionally and argue that the deal

value is not dependent upon future performance because it is not mentioned

in either the Heads of Agreement or the draft Share Purchase and Sale Agree-

ment, which is the prime legal document for the acquisition. This may be so,

but it is a naïve response. Clearly, the acquirer values a business to reflect likely

future performance. So you must be persuasively insistent that your due diligence

will include:

• forecast current year financial performance

• financial projections given by the vendors for any subsequent years

• the adequacy and validity of the order book, for example the optimistic

approach of including ‘reservations’ as part of the order book or

statistically weighting possible orders to boost the figures

• the terms of facilities management contracts with clients, which may

range from three to seven years in length, but contain a clause that

the client can terminate the contract unilaterally for unsatisfactory

performance with only 90 days notice

If this work reveals an unsatisfactory picture then remember that you have the

right to seek to renegotiate the deal or even withdraw.

Taxation and VAT matters are important. The fact that the acquirer will have a

full cost indemnity for pre-completion liabilities should be regarded as inade-

quate comfort. Ideally, taxation and VAT returns will have been submitted on

time and agreed with the Inland Revenue.

You need to recognize that a major issue may take more than two years to resolve

with the Revenue. In the meantime, you will have to instruct and pay tax advisers.

Furthermore, the Inland Revenue may insist on interviewing senior manage-

ment. The final settlement may include a full repayment of tax liability, plus interest

for the late payment and a penalty charge. If the issues are sufficiently signifi-

cant, you may wish to delay legal completion until agreement is reached with

the authorities.



If the tax due diligence reveals any significant issues, it makes sense to insist

that an adequate sum is held in escrow to ensure that the funds are available

to meet the anticipated liability.

Pension due diligence

Gaping deficits in pension funds have become a regular feature in the financial

pages. For FTSE 100 companies, deficits of more than a billion pounds have

occurred. It would be entirely wrong, however, to think that pension deficits

occur only in large quoted groups.

Fortunately, final salary pension schemes are uncommon among unquoted

companies and these are the prime cause of deficits. Nonetheless, it is essen-

tial that due diligence is carried out on every pension scheme and any deficit is

reflected in an adjustment to the purchase price.

Legal due diligence should include contractualissues and regulatory compliance

Fortunately, legal due diligence is an integral and familiar part of the role of a

solicitor who handles acquisitions and disposals on a full-time basis.

Obviously, freehold and leasehold issues will be addressed but contractual issues

and regulatory compliance need to be covered as well. Contractual issues include

any matter where there is a clause which refers to a change of ownership or

majority equity control. This could cover customer contracts, exclusive supply

contracts with an overseas supplier and share option schemes which would enable

senior executives to realize a substantial capital gain. The reality in most cases

will be that the acquirer is stuck with these provisions, and a commercial assess-

ment of the risks has to be made.



Assess the disclosure statement by the vendor and negotiate changes

The disclosure statement is potentially a sucker punch. Some vendors will do

their best to avoid handing over the disclosure statement until the day of comple-

tion, but it is in essence an addendum to the Share Purchase and Sale

Agreement which can negate or undermine your hard won indemnity and

warranty clauses.

Solicitors to the vendors should, and usually do, insist that a complete disclo-

sure statement is made. It is not uncommon for the disclosure statement to be

a briefcase full of miscellaneous documents, which requires several hours to assess

the implications and, more importantly, time to negotiate/insist on amendments.

The timetable to legal completion should state a specific date for the receipt of

the disclosure statement by the acquirer, and this should be several days before

legal completion. It is too late to follow up the non-receipt of the disclosure state-

ment on the due date. Follow up needs to take place well in advance to ensure

that there is adequate time to assess and renegotiate as appropriate.

Corners must not be cut. If the disclosure receipt does not allow adequate time

to assess and renegotiate, then legal completion should be delayed.

Prepare to announce the deal internally and externally

Whilst the due diligence and legal work is carried out, the acquirer should prepare

detailed plans to announce the acquisition on legal completion to:

• staff

• customers and suppliers

• regulatory authorities

Some acquirers concentrate only on announcing the deal to the management

and staff of the target company, but the existing staff need to be informed as

well because they may be anxious about likely redundancies and relocation. With

modern technology, there is ample scope to make a welcoming and persuasive

approach to new staff, but this does not eliminate the need for face-to-face

meetings to answer questions, doubts and fears. If you don’t do it, the

grapevine will and inevitably you will suffer.



Email allows you to contact customers and suppliers immediately. This is not

enough, however, for companies important to your future. Personal visits should

be arranged and ideally involve more senior people on both sides than those

involved in the everyday conduct of the trading relationship.

The notification of regulatory authorities is good housekeeping but important

nonetheless, and it should be done promptly.



Chapter 8Post acquisition management: Turn around loss makingcompanies effectively and quickly

Make an initial impact

Set up reporting relationships and authority limits

Establish clear rules for handling the media

Keep head office interference to a minimum

Get an overview of the business

Start with the sales team

Scrutinize overhead and administration costs

Tackle production and procurement costs… and opportunities

Set relevant short-term forecasts and objectives

Financial planning and control need clear priorities

Create a budget for the new financial year

Examine research and development

Address the medium-term future for the business

Make redundancies urgently and humanely


Chapter 8Post acquisition management: Turn around loss makingcompanies effectively and quickly

The turnaround of a loss-making company acquisition needs to be starkly different

from the approach adopted for a company which is performing satisfactorily

or well.

The key to a successful turnaround is a full-time chief executive, a part-time

appointment is inadequate when an acquisition is loss-making and haemor-

rhaging cash. Urgency is of the essence. Furthermore, it is strongly recommended

that the prospective chief executive is intimately involved in the decision to acquire,

otherwise you face the risk of being told later “I would never have bought this

company” which may well be an excuse of a failing chief executive.

Ironically, chief executives of successful businesses are often ill-equipped for

turnaround success. They are used to a measured and evolutionary approach,

whereas a turnaround demands urgency and at times a somewhat brutal approach.

The purpose of this chapter is to outline a tried and tested approach to achieve

a successful turnaround. It is unlikely that losses have resulted from a lack of

effort by management and staff. The need is to redirect effort, rather than increase

it, and to focus on results.

Make an initial impact

The first and urgent task is to ensure the company is not trading illegally and

that sufficient cash flow will be generated to allow the company to survive in

the short-term. The existing management will probably expect and want

immediate action from the new executive. Furthermore, they will expect the action

to be tough. The executive will be rightly concerned about his or her ignorance

of the company. Radical organizational change or the switching of key

personnel, if implemented too quickly, might prove to be misguided measures

in the months to come. Nonetheless, some impact can be made immediately, as

outlined below.



Temporary help

Terminate all temporary help immediately and fill the resulting gaps by

redeploying existing permanent staff. If this causes a real problem, someone

will scream loud enough. In the end the business is unlikely to suffer.

Indirect staff

Insist that the recruitment of all indirect personnel (part of the company overhead),

including replacement staff, will need chief executive approval before any action

is taken. Review all indirect staff recruitment in progress. Stop all hiring except

where an exhaustive check of existing staff availability reveals an unquestion-

able need.

Direct staff

If there is any likelihood that some redundancies will be necessary in due course

amongst staff directly involved in producing and delivering the product or service,

then any recruitment should require chief executive approval. This applies partic-

ularly in those countries where staff costs should realistically be regarded as

fixed in the short-term, rather than variable, because of the difficulty and cost

of terminating any employee.

Fixed assets

Insist that all capital expenditure above a given level is approved by the chief

executive. Wherever possible, delay non-profit projects such as the replacement

of staff dining-room equipment, refurbishing car parks, etc. Ask that unused

plant and machinery be identified with a view to disposal, and that under-utilized

floor space be identified so that the use of facilities can be rationalized in due

course.

Inventory

Ensure that significant purchases against anticipated special orders receive chief

executive approval. Material purchases should be allowed to proceed normally

when covered by firm orders or when part of a standard product specification

provided that stock levels are not excessive. Ask that all redundant stocks be

identified and vigorous attempts made to dispose of the surplus at whatever

price can be obtained.

8 POST ACQUISITION MANAGEMENT


Offices and office equipment

Cut back sharply on the redecoration of offices and the routine replacement of

office equipment. The order of the day should be to ‘make do and mend’ wherever

financially justified.

Personal cars

Delay, wherever possible, the replacement of cars supplied and maintained by

the company, and keep the authorization of additional cars to an absolute

minimum.

Foreign travel

All foreign travel should require chief executive approval. In one actual

example, the marketing manager had arranged a three-week visit to Brazil in

order to assist the company’s local distributor to expand sales. A request for a

visit programme listing the companies and executives to be visited quickly estab-

lished that no such planning had been done. The approval was deferred until

such time as the local distributor had arranged an effective itinerary. Six months

later the application still had not been re-submitted.

Where significant costs are incurred on travel between various company locations,

it may be possible to make savings quickly by using video conferencing techniques.

Entertaining

Check expense claims to ensure that any entertaining of clients is not unnec-

essarily lavish. There is more at stake here than the cost of the entertaining; in

a loss-making company many employees justifiably feel bitter when they hear

about expense of this kind.

The impact of a series of immediate actions such as those listed above (not an

exhaustive list) really gets the message across that the decks are being cleared

for action. The objective is to make the most effective use of the human and

material resources already employed in the business. Admittedly, the impact of

these actions is likely to be more important in terms of the effect on employee

attitudes than on profitability and cash flow; but some tangible improvement

will almost certainly result. Clearly, the turnaround executive will want to reduce

the list of actions requiring personal approval as soon as his or her values and

standards are shared by the management team.



Set up reporting relationships and authority limits

Select the key people with whom you want regular and close contact, at least

for the time being, to address short-term problems. This does not imply creating

a new organization structure, which would be premature, but is intended to create

effective management communication.

No chief executive can effectively authorize every item of revenue expenditure,

so authority limits should be delegated to selected people as soon as possible.

Establish clear rules for handling the media

This may seem a strange priority at the outset, but it is an essential one. For

example, a disgruntled employee may mischievously alert the local press to the

threat of imminent redundancies. Alternatively, there may be an accident or

whatever. It should be made clear that the only contact with the media is to be

via the chief executive. If a member of staff is contacted by the media, they must

know exactly the response to be given.

Keep head office interference to a minimum

Well-meaning head office executives love an acquisition, because it gives them

an excuse for a day out and an expenses paid lunch. This not only wastes precious

management time but it sends completely the wrong message to a loss-making

subsidiary.

Similar follies are the despatch of the group HR manual, or such like, which in

an actual case was sent with a compliments slip stating ‘for immediate imple-

mentation’. Equally, e-mail requests for statistical information are a waste of time.

At the outset, the turnaround chief executive must insist that all head office

communication is made via him or her for the time being.



Get an overview of the business

Now the turnaround programme may be started in earnest. The first task is to

understand what is happening in the business, before taking precipitate execu-

tive action. What is more, the answers necessary for short-term success are likely

to be found amongst the middle and senior managers of the company. The key

questions to be asked of people by the turnaround executive are as follows:

• What key factors are stopping you and the business being more effective

and successful?

• What inexpensive and simple action would have a substantial effect

on the performance of the company?

• What extra help do you need to do your job more effectively?

• What tasks could be eliminated altogether or made simpler and more

effective?

• What is not being done that needs doing urgently?

Managers are often able to highlight a key problem area or opportunity in another

department of the company while not being able to see scope for improvement

in their own job. The turnaround executive needs to be a good listener who neither

takes sides nor apportions blame.

Start with the sales team

Even in a high-technology company there is the strongest case for trying to under-

stand the fundamental problems facing the business by examining the sales

activity first. Almost by definition, a loss-making company cannot claim to be

sufficiently customer and market-oriented. Ideally, every sales employee should

regard their job as helping to provide outstanding service to present customers

and anticipating the future needs of both established and potential customers.

In working to achieve this state of affairs, there is no effective substitute for making

field visits with sales staff, visiting agents and distributors, calling upon impor-

tant customers, potential customers and even important established users of

competitive products. Board meetings are unlikely to provide an adequate insight

into the sales and marketing issues facing the business.

Two weeks spent in the field represent an excellent investment of the turnaround

executive’s time at this stage. In this way, first-hand information can be obtained

about the product quality, service and delivery performance. Price competitive-



ness, the benefits offered by competitive products, the effectiveness of sales and

distribution networks will begin to be understood as well.

Attention should next be focused on the sales office and sales support services.

The time already spent in the field will prove invaluable in asking the relevant

questions about the effectiveness of sales support. A good starting point is to

check how effectively action is taken on emails and telephone calls from customers.

Operating standards are vital. Enquiries and orders should be acknowledged

the same day. Complaints and requests for after-sales service require particu-

larly prompt attention. It is essential to notify the customer of the action being

taken without delay. General emails, too, should be handled promptly. When a

telephone query cannot be dealt with on the spot, a promise should be made

to call back by a given time, and that promise must be honoured.

Clearly the effective handling of emails and telephone calls is not a panacea for

the sales ills confronting a business. The attitude of mind that creates this type

of effectiveness, however, is a prerequisite for what needs to be achieved in the

coming weeks and months.

The turnaround executive will then want to evaluate other important aspects

of the sales operation. At this stage, the executive’s previous management experi-

ence and newly-gained knowledge of the present business will indicate which

aspects require attention. Aspects to evaluate may include:

• The existence of adequate targets, incentives, operating standards,

training and supervision for the sales force.

• The liaison between the sales and production departments to ensure

that the various customer demands and priorities are met in a cost-

effective way.

• The finished goods stocking policy used to ensure a balance between

meeting customer orders from stock and the attendant cost of holding

the inventory to achieve this goal.

• The acceptance of orders for custom-made products as opposed to

standard ones, and the basis for assessing the costs involved and the

price to be charged.

• The responsibility and basis for offering one-off, cut-price or discount

deals to customers or clients.

• The extent to which the sales people participate in helping to collect

overdue accounts from customers.

• The need to make the maximum use of information technology to help

the sales force improve the service to customers and clients.



This is an intentionally simple approach, based on finding out exactly what

happens rather than installing sophisticated management systems and controls.

Successful turnarounds are usually initiated by executive action ensuring that

a few simple but important things are done outstandingly well. Installing some

basic management controls should wait until this first stage in recovery has been

effected.

It may appear somewhat illogical to investigate the sales activity before tackling

the broader issues of the market place and marketing; the reason for this is

pragmatic. Even a sketchy knowledge of the sales effort, problems and oppor-

tunities will lend considerable perspective to an understanding of the marketing

challenge facing the business. Important marketing aspects to be looked at include:

• Any major products or services in the research and development stage

for which there should be a clear-cut work programme through to

product launch with an attendant expense budget.

• Business development, including efforts to identify and pursue new

products, services, territories, market segments and distribution

channels.

• The effectiveness of sales promotion, advertising and exhibition

expenditure.

• The liaison between marketing and R&D to ensure that research projects

are based on market-oriented assessment of customer needs and

provisional product specifications.

• The extent, relevance and value of market research activity and data

within the company as a basis for future business development.

• The possible need for a reduction in the range of products/models and

services offered to the customers to ensure compatibility between

market needs and the cost-effective use of production resources.

Scrutinize overhead and administration costs

In the USA ‘burden’ is a word widely used for those costs. For a turnaround

situation, the word ‘burden’ is truly appropriate. Overhead and administrative

costs must be affordable, given the likely sales volume and gross margin in the

next year or so.



The chief executive should have value analysis concepts very much in mind. He

or she will be asking themselves, and others, the reason for each administra-

tive activity, using the following type of questions:

• Is the work necessary to meet statutory, legal or fiscal requirements?

• If not, what detriment would there be to the business in either the short

or long-term if the particular task or department was eliminated?

• If the work still appears necessary, who benefits internally, and is the

existing service the most cost-effective and relevant approach?

• Are any administrative departments overstaffed or staffed to meet a

peak demand?

• Is there any administrative work not being done which would represent

both a tangible benefit and a net overall saving to the business?

• Are costs higher than necessary as a result of using expensive

contract staff?

• Could any services or departments be outsourced partially or completely,

to reduce costs without damaging the business later?

• Is maximum and cost-effective use being made of information technology

such as recent developments in data storage and transmission, direct

input and email?

• How can the number and layers of management be pruned without

the business suffering?

At the end of this learning period the chief executive should have got across

the message to the team that empire building and status symbols are out. The

order of the day is to provide a service which is relevant and represents value

for money.

Tackle production and procurement costs… and opportunities

In the same way that time was spent in the field in order to appreciate quickly

the sales and marketing problems, it is necessary to spend time in production

departments and warehouses to begin to understand the production challenge

facing the business. Good housekeeping is important. It is not just a question

of tidiness. If management and workforce alike do not take pride in their surround-

ings and adopt high standards, they are unlikely to take pride in the quality of

the products and services supplied to customers.



On the very first visit to each location the chief executive should not hesitate to

point out any lack of good housekeeping and to expect rapid action to improve

the situation. Once again the premise is that major improvement throughout

the production process needs a basic change of attitude at the outset. The

turnaround executive will constantly be asking fundamental questions: Why?

How? What? The specific questions may include:

• What are the major constraints holding back increased output and

productivity, quicker and more reliable delivery performance, better

product or service quality and reliability, and reduced inventory levels?

• How can we overcome these constraints in the most effective and

inexpensive way in the shortest time possible?

• What should be done to improve the working conditions, motivation

and morale of the workforce? How much will this cost? What other

savings can be achieved to pay for it?

Set relevant short-term forecasts and objectives

Actual performance, measured in terms of sales, gross margin and pre-tax profit,

may be so far removed from the current year budget that new forecasts are

required.

The approach should be to ask directors to produce month by month forecasts

for the remainder of the year for:

• sales, ideally made up by product or service category

• gross margin percentage

• overhead costs

The chief executive should challenge the thinking behind these forecasts and

then make any amendments he or she feels necessary. This is not my recom-

mended approach to budgeting, but the early days of a turnaround demand

special measures.

A vital rough and ready calculation of a monthly break-even sales figure should

be calculated and communicated to the team.



The arithmetic is very simple:

If monthly overheads are, say, £150,000 and the gross margin is, say, 30% then:

Monthly overheads ÷ £150,000

Gross margin percentage 30%

Break-even monthly sales = £500,000

This enables the chief executive to agree with the directors in which month break-

even will be achieved and to get their collective commitment to achieve this vital

goal on time.

Financial planning and control need clear priorities

Accurate and prompt financial planning and control are essential. The

company may have a relevant and sophisticated, integrated IT system, but the

old adage of ‘garbage in delivers garbage out’ applies particularly to a

turnaround situation.

Accurate monthly accounts demand accurate and prompt input from every

department. The reality may be sloppiness.

Ideally, the new chief executive would have an experienced turnaround finan-

cial manager from the outset. If this is not feasible, then the chief executive has

to spell out what is needed to the present incumbent. Not just the chief execu-

tive but the financial manager must listen to, talk and sell to the management

team what is required. It really does require financial management by walking

about.

Create a budget for the new financial year

The preparation of a budget for the coming financial year offers an opportu-

nity to pursue further the installation of effective short-term management within

the business. The management team has by this time had the experience of making

a commitment of a forecast for the current financial year and delivering that

commitment.



The finance staff will have been directed about the scope, methods and format

required for financial planning, control and forecasting in the coming year and

will be ready to implement this, starting with the preparation of the annual budget.

Each member of the management team will be expected to back his or her budget

commitment with a quantified management action programme and a statement

of the key milestones to be achieved on business development projects. This will

ensure that there is a balance between the amount of executive time spent on

day-to-day management problems and that invested in pursuing projects to

achieve further profitable growth.

The chief executive must spell out that the directors have collective cabinet

accountability to achieve both the pre-tax profit and cash flow generation month-

by-month and annually. Reasons for a shortfall must be accompanied by action

to get the full year performance back on track.

Examine research and development

There is a strong temptation for the turnaround executive to avoid getting to

grips with the R&D activity because of a lack of technical expertise. The tempta-

tion must be resisted at all costs. It is perfectly admissible to admit to ignorance

of the technology involved, provided that the executive demonstrates a willing-

ness to appreciate the problems of and to take a lively interest in the work of

the department. This approach will almost certainly enhance the respect that

hopefully he or she has already earned. Questions to ask in the R&D depart-

ment may include:

• Who initiated each R&D project currently in progress?

• What budget and programme exists for each project? How does actual

performance compare with the original budget and programme?

• What financial return is expected from each project. What market

research data is this based on? What product specification and price

profile has been agreed with marketing and defined as the objective?

• What existing projects should be examined with a view to termination?

• What new projects should be initiated? For what reason?

• How can information technology be used more widely and effectively

to increase the productivity of R&D staff?



• How can the Internet be used as a research tool to spur innovation

and to provide a valuable information resource?

• What is the allocation of R&D resources between basic research, new

product R&D and the improvement of existing products? Does this

allocation meet the future market opportunities and competitive

challenges facing the business?

• What is the current level of sales and marginal profit contribution

derived from products emanating from in-house R&D?

• What R&D work is outsourced or sub-contracted to other organizations?

Which projects or specific tasks should be outsourced or sub-

contracted in future?

Address the medium-term future for the business

The chief executive must not see the extent of the turnaround role as being the

elimination of losses. That is only the first step – and often the easier one. The

second stage is to achieve an acceptable return on the funds invested, or to dispose

of the business as a going concern.

If the requirement for achieving a turnaround has resulted from long-term

changes in the market place in which the company operates, then it will almost

certainly be necessary to re-position the business. This involves a planned

withdrawal from unprofitable products, services, market segments and terri-

tories, and developing or acquiring alternative business which offers adequate

profitability and future growth. The re-positioning of the business can take place

in several ways. For example, the company could decide to look for future growth

throughout, say, Europe; or it could concentrate on developing a higher quality,

higher priced product range; or it could develop its ability to sell custom-made

products profitably. A further option may be diversification to an extent which

requires either a joint venture or an acquisition.

While the turnaround executive may discuss ideas on the subject with other

managers, and may well invite their suggestions, the responsibility for decision

rests squarely on his or her shoulders alone.

In the end, the conclusion may be that the business should be sold as a going

concern to another company better placed to make an acceptable return from



the funds invested. If so, the turnaround executive must have the courage to

present the facts to the board for approval. It must not be seen as a statement

of failure. In the final analysis, the management of opportunity is more

rewarding than the management of problems, from the standpoint of share-

holders, managers and employees alike. Once approval for disposal is given,

then the turnaround executive should expect to be actively involved, and probably

personally accountable, for identifying prospective purchasers and successfully

negotiating the sale of the business in conjunction with specialist advisers.

Throughout all this there will be uncertainty, anxiety and fear felt by workforce

and management alike. The turnaround executive must learn to cope effectively

and be a person of integrity with outstanding management skills and, above

all, the ability to communicate. It is important that he or she should appear

cheerful, assured and poised at all times. If there are signs of despondency or

being out of one’s depth, the effect on morale may be shattering. Both manage-

ment and workforce will look to the turnaround executive for confidence and

reassurance. The executive’s approach should be like that of the dentist who,

at the outset, describes to the nervous patient the nature of the treatment he or

she is about to receive and then explains each step.

Two other aspects of communication are important: making promises and dealing

with rumours. From the very start the turnaround executive must not make any

promises which are either beyond his or her control or beyond present horizons.

It is not unusual to be asked on the first day if an assurance can be given that

there will be neither redundancy nor office relocation within, say, the next six

months. At this stage, the turnaround executive is not able to give such an under-

taking. The other feature of a turnaround situation is the proliferation of rumours

from top to bottom of the organization. Rumours must be flushed out into the

open as quickly as possible, and an appropriate statement made by manage-

ment. Rumours left undealt with merely fuel the anxiety which already exists.

In conclusion, it can be said that every turnaround situation presents a unique

set of problems. There are no ready-made answers. The outcome of a successful

turnaround is defined as achieving an adequate return on the total funds invested

in the business, and not simply as the elimination of loses. The methods outlined

for handling the situation successfully are based on taking effective executive

action initially, rather than concentrating on improved management control

systems and procedures. The key to success is to concentrate on doing a few

simple but important tasks outstandingly well, and to communicate confidence

and reassurance to managers and staff throughout the business.



Make redundancies urgently and humanely

I have deliberately left the most powerful issue to last. Neither managers nor

employees will be grateful to you for delaying the inevitable need for redun-

dancies. They will recognize the situation and there will be a ‘sigh of relief’ when

the redundancies are announced. A piecemeal approach to reducing the

workforce has a devastating effect on morale. Nevertheless, if the situation was

sufficiently serious to warrant earlier redundancies, then no doubt they would

have happened.

Consideration should be given to making use of temporary staff, short fixed-

term contracts for staff and outsourcing as part of a review of current staffing

levels.

Each member of the management team should be asked to produce a list of people

either to be made redundant or transferred internally. The information required

in addition to the names of the people affected is their job title, length of service,

annual income, notice period and the cost of termination.

This part of handling a turnaround situation is undoubtedly the most unpleasant

aspect of the job. The executive reluctantly responsible for this task must do the

utmost to ensure that people are treated fairly, and as generously and compas-

sionately as possible. Failure to recognize the need for a reduction can only result

in putting the jobs of everyone in the business at risk.

One thing the chief executive must ensure is that the scheme to reduce the number

of staff covers the entire business, from workforce through to senior manage-

ment; otherwise a top-heavy organization may well result. Clearly, however, to

meet the future needs of the company some departments will need to suffer

heavier cutbacks than others.

The next aspect to be stressed is confidentiality and security. If anyone other

than the turnaround executive’s secretary does the word processing and copying,

the information might as well be put on the company notice board. Detailed

planning should be carried out to arrange for all severances to be notified and

executed at the same time, so that uncertainty and anxiety among the remaining

personnel can be kept to a minimum. Equally important, appropriate notifica-

tion should be given to staff unions and government departments in accordance

with the highest standards of custom and practice of the particular country.



Chapter 9Utilize expert streetwise tactics

Discuss the structure and form of consideration

before making a written offer

Realize that too low an initial offer may lose the deal

Reveal any onerous conditions early to reduce their impact

Spell out and sell your management approach

Recognize that your conduct prior to completion is crucial

When negotiating the final deal it is unlikely that

the vendors can justify a higher offer

Criticizing the business to the owners must be avoided

Quid pros quos are an effective way for win-win negotiation

When no agreement is reached, keep the door open


Chapter 9Utilize expert streetwise tactics

The tactics you adopt and your personal conduct are likely to determine whether

or not you successfully legally complete an acquisition. The level of your offer

alone, unless it is overgenerous, does not ensure you will succeed.

To acquire a company you have to sell:

• yourself – as a trustworthy, reliable and friendly person to do business

with

• your company, management style and post-acquisition management

approach

• your offer – which meets the particular needs of the vendors even

though it may not be the highest offer

Discuss the structure and form of considerationbefore making a written offer

If you decide to make a written offer without discussing the level of your offer,

structure and form of consideration, you are shooting in the dark and may well

miss your target, without a second chance to succeed.

At this stage, it is worth outlining the total value of your offer as a range in order

to give you room for manoeuvre. As well as listening to what the vendors say

in response, do watch their eyes, facial expression and body language. Non-

verbal responses are likely to be more honest!

If you are insistent on an earn-out deal, where the deferred purchase consid-

eration is contingent on achieving profit targets, typically over the next two

financial years, do make it clear that this is a must for you. At this stage I advise

against using the words ‘it is a deal breaker issue’ because it may prompt an

angry and emotional response. Outline the amount of purchase consideration

you will pay at legal completion, which should reflect reasonably – but not

overgenerously – the value of the company today. Sell the earn-out considera-

tion as an opportunity for the vendors to be paid for future success and necessary

protection for you against identified vulnerabilities.



Some acquirers fail to realize that the form of purchase consideration can be a

deal breaker issue for some vendors. For example, a £40M market capitaliza-

tion AIM listed company may insist that 50% of the purchase consideration is

payable in their shares. Also, there may be an embargo preventing the vendors

from selling any shares for one or two years. The acquirer will need to be really

persuasive to sell this structure.

Some private companies seeking to acquire may offer 50% of the purchase consid-

eration in the form of an interest bearing loan note, with the capital repayable

in three annual instalments. If it is a bank guaranteed loan note or an insurance

bond there is adequate security, but a guarantee only by the acquirer leaves the

vendors potentially vulnerable. Once again, real persuasion will be needed.

Based on these discussions, you are much better placed to formulate an offer

with a decent chance of acceptance. But go one step further, within 24 hours

of the receipt of your offer, telephone the vendors to clarify and discuss any queries

they have.

Realize that too low an initial offer may lose the deal

This is best illustrated by an actual sale where I advised the vendors. The company

was an attractive opportunity and prospective acquirers were told, before making

an offer, that there were five serious acquirers ready to bid. Four offers we received

in the £12M to £14.5M range, and a Footsie 100 company offered £8.5M. They

were invited to submit a significantly improved offer, but declined despite the

fact that they had most to gain from the acquisition.

The business was sold for £15.5M, and about three months later I met the £8.5M

bidder at a seminar. He told me that he had authorization to bid up to £20M,

but was convinced I was bluffing and he could impress his boss by pulling off

a cracking deal. To compound matters, he said I would have happily paid up to

£20M. I leave you to form your own judgment on his tactics.

9 UTILIZE EXPERT STREETWISE TACTICS


Reveal any onerous conditions early to reduce their impact

What is onerous rests in the opinion of the vendors. For example, shortly after

shaking hands on a written offer I told the vendor that his 26 year old son would

have to give up his job as Marketing and Sales Director. The business employed

over 1,000 staff and 60% plus of sales were overseas, and the son was simply

far too inexperienced and a playboy to boot.

The vendor literally erupted with anger. I never said a word until the emotional

outburst had subsided. Half an hour later, he agreed and with good grace.

It was a deal breaker issue, but left until immediately prior to legal completion

or shortly afterwards, the vendor could justifiably regard the requirement as

an act of bad faith and be left pondering what other nasty surprises would be

revealed.

Spell out and sell your management approach

Vendors worry about lots of things, and an astute acquirer will find out what

these are and address them. Typical examples are:

• job titles

• reporting relationships with the acquirer

• cheque signing authority

Of more substance, however, is the management approach you will adopt post-

acquisition. An effective way to sell this is to introduce the vendors to the owners

of a business you have acquired during the past two years and allow them to

meet without any group people present.

The concerns of vendors often centre on procedures such as:

• annual budgeting

• monthly reporting and updated year end forecasts

• capital expenditure appraisal

• attendance at formal board meetings

• interference by group executives

Your job is to promise help and give reassurance, stressing that it is vitally impor-

tant that you maintain the entrepreneurial flair of the business within a group

framework.



Recognize that your conduct prior to completion is crucial

At worst, an overly aggressive approach may lose you the deal because the

vendors decide not to do business with you. It does happen, I promise you. More

likely, however, you may find that post-acquisition management is more diffi-

cult because an effective rapport has not been established.

Deal breaker issues should be kept to an absolute minimum, probably not more

than two or three, if you are to succeed. Threats, ultimatums and unrealistic

deadlines do happen and provoke a predictable response from the vendors. Your

goal must be to have established a first class rapport with the vendors and have

agreed post acquisition plans prior to legal completion so that the deal gets off

to a flying start.

When negotiating the final deal it is unlikelythat the vendors can justify a higher offer

The reason is simple. Vendors are keen to reveal all of the potential opportuni-

ties before you value the company and make your offer. So it is unlikely there

is adequate reason for you to increase your offer.

I really do believe that any increase should be modest and made in exchange

for something which is valuable for you.

Criticizing the business to the owners must be avoided

This is a cardinal sin! You cannot gain from these tactics, and are likely to alienate

the vendors. Yet some acquirers use this tactic to justify not increasing their offer.

The positive way is to express your justifiable concerns about some of the vulner-

abilities the business faces.

9 UTILIZE EXPERT STREETWISE TACTICS


Quid pros quos are an effective way for win-win negotiation

You should regard any increase to your written offer as a ‘give away’ without

any justification to do so, unless you get something in return which is at least

equally valuable to you.

Please do not dismiss this approach as simply playing with words. It is not! Be

prepared to ask the vendors what they are prepared to offer you in return for

an increase or concession from you. Their answer may surprise you and more

than fully justify your action. If they do not come up with any attractive sugges-

tions, be ready to put ideas to them.

When no agreement is reached, keep the door open

Where you have made an unsolicited approach to acquire and your offer is

rejected, you should maintain regular contact at, say, quarterly intervals. Agree

to meet for lunch, attend a trade dinner together or extend an invitation to a

corporate hospitality event. Vendor circumstances may and do change suddenly

and abruptly. The discovery of a terminal illness or a major family disagreement

are just two examples.

Another situation is where your offer is rejected and the vendors sign Heads

of Agreement and give a period of exclusivity to another acquirer. A surprising

number of deals fail to complete at this stage. Reasons include unsatisfactory

due diligence causing the acquirer to withdraw or reduce their offer; deal breaker

issues which could not be resolved and a failure by the acquirer to finance the

deal or to offer adequate security for deferred consideration.

Make it clear to the vendors that your door is still open if problems arise. If they

do come back to you, the reasons given for non-completion may be less than

truthful. Your negotiating position is now dramatically stronger. Be ready to forget

your previous offer. Get the vendors to update you on current trading and be

prepared to make a lower offer. Failure to legally complete after Heads of Agree-

ment comes as a bitter blow to most vendors. It is understandable that they are

hugely disappointed and may well be prepared to accept a lower offer. Seize

the opportunity!



Chapter 10Choose and appoint advisers with care

Identify the help and advice you need and want

Recognize the advice and help which is available

Create an effective beauty parade to select advisers

Always agree fees and negotiate the engagement

letter before appointment

Telephone references on individual advisers really are valuable

Ensure advisers keep you informed of progress


Chapter 10Choose and appoint advisers with care

My golden rule is that an adviser must never be allowed to learn at your expense!

Sadly, some advisers are all too willing to do just that. So always make sure that

the lead adviser has relevant expertise and experience.

Identify the help and advice you need and want

The first step is to recognize the work which should be done in-house:

• formulate your acquisition strategy based upon your corporate goals

• translate your acquisition strategy into an acquisition profile to focus

your search

Whether or not you can do the remainder of the work in-house depends upon

the people you can make available with the expertise and experience needed.

Acquisition work is often seen as exciting by internal people and you must make

sure that they do not learn at your expense or that important day-to-day work

suffers.

The other stages involved include:

Carry out an acquisition search

In the UK this can be done in-house by a suitable commercial person with some

sector knowledge. Overseas, the only real way to carry out an effective search

is by using someone based in the country to make initial contact with target

companies.

A UK search can be done in-house but it requires the managing director to be

involved. The most effective way is to telephone the decision-maker within a

target company and to extend an invitation to lunch to discuss mutual oppor-

tunities. Towards the end of the lunch, you can mention that you have always

respected the target company and whenever a sale is to be considered you would

be interested.



It is time consuming for the managing director because ten approaches, and

ten lunches, may be needed to find a relevant opportunity.

In contrast, a corporate finance adviser can telephone the decision-maker on

behalf of a client, un-named if necessary, to explore an acquisition with the promise

that the client will be named at a first meeting. Curiosity plays a part and the

prospective vendors may be prepared to meet the adviser.

Meet the vendors to obtain a picture of the business

If both sides agree to progress matters, the next step is for the managing director

to persuade the vendors to spend half a day exchanging information so that a

written offer can be made.

I passionately believe that unless the prospective acquirer is able to handle this

information gathering meeting, and does so, they are not equipped to make an

acquisition!

The information gained from this meeting should be used to decide:

• whether or not to make an offer

• the level of the offer

• the deal structure proposed

Meet the vendors to discuss your offer

If you intend to use corporate finance advisers, they should be involved at this

stage to:

• review and challenge the level of the offer you intend to make

• provide advice on an earn-out deal structure

• act as a buffer between you and the vendors

• and continue to be involved to legal completion

Formulate the written offer

This requires a background knowledge of relevant company law, taxation, stamp

duty and VAT implications. Earn-out deals are a potential minefield for any

acquirer, and it is essential that the formulation of the offer is done by someone

with ample experience

10 CHOOSE AND APPOINT ADVISERS WITH CARE



Once again, a corporate finance adviser can act as a buffer and ensure that the

Heads of Agreement are technically sound regarding company law, taxation,

stamp duty and VAT.

If a corporate finance adviser is involved, there is no need whatsoever to involve

a solicitor at this stage.

Carry out due diligence

Due diligence costs have to be paid even if the deal is aborted at the last minute,

but I regard it as valuable protection for the acquirer. Unless you have in-house

specialists regularly involved in due diligence, outside advisers should be used.

Handle the legal work

Unless you have in-house solicitors handling your acquisition and disposal work,

I regard it as essential to use a firm of solicitors with at least one partner handling

acquisitions and disposals on a full-time basis.

Recognize the advice and help which is available

The types of advice you may need are:

• acquisition search and initial contact with vendors

• corporate finance

• due diligence

• legal

Major accountancy firms may well offer you a one-stop shop for all the advice

you require, but be wary!

In recent years, specialist advisers have emerged to handle the initial search and

contact with prospective vendors, as well as commercial due diligence. Make

sure you meet at least one of these firms as your prospective adviser.

Corporate finance advice is available from both major and medium-sized account-

ancy firms, as well as from independent corporate finance boutiques.



Accountancy firms regard due diligence as their domain. But they may not be

equipped to handle everything which is involved. Commercial due diligence

involves much more than bringing a commercial awareness to financial due

diligence. Environmental and pensions due diligence demand expert advice.

Legal work should be handled by a firm of solicitors of a suitable size whereby

the transaction will be handled personally by a partner. If you go to a major

multinational law firm you may pay considerably more and have the work done

overwhelmingly by a manager.

I would like to believe in the effectiveness of Chinese walls, but struggle to do

so. You will be assured that a firm offering both corporate finance advice and

due diligence, will not be compromised by the need for you to risk the deal by

renegotiation as a result of due diligence findings. A one-stop approach does

create potential conflicts.

Create an effective beauty parade to select advisers

I believe that a beauty parade should involve no more than three of four prospec-

tive advisers for each type of advice. Firstly, identify suitable firms to select. The

tried and trusted method of asking business acquaintances for suggestions is

an obvious starting point. Trade press magazines may contain articles or case

studies written by advisers, and news of completed deals may name the advisers

involved. Internet search and reading websites is another source.

If you are unsure which individual to contact, telephone the personal assistant

to the senior partner and ask who is the relevant partner to handle the size,

complexity and business sector of your deal. When you speak to the person,

outline your needs and the agenda you wish to address when you meet.

At the meeting, questions to be asked of any professional adviser include:

• What transactions of similar size and complexity have you personally

completed in this market sector or a similar one?

• Which transactions have you personally completed in the last 12 months

and what were the deal values?



A crucial piece of information to obtain is an indication of the likely fee, and

the basis for charging. Due diligence will inevitably be a fixed fee regardless of

whether or not you legally complete a deal.

Acquisition search and initial contact with target companies should be carried

out for a fixed fee, which does not deliver any profit to the adviser, and a

percentage scale fee for a legally completed deal.

Corporate finance advice should be charged for work done up to a set limit and

a fixed success fee payable only on legal completion. Disbursements payable

should cover only out-of-pocket expenses up to a given limit. It may be wrong

to select the lowest fee quoted, but you can use this as a negotiating tool with

your preferred adviser.

Lawyers should be asked to give a budgetary fee estimate, based on the deal

as described, which will only be increased if they can demonstrate that the actual

complexity involved requires more work. Also, it may be possible to negotiate

a maximum fee for work done and a reasonable success fee payable only at legal

completion.

When meeting prospective advisers, do obtain a copy of their standard letter

of engagement because some contain onerous clauses stacked heavily in favour

of the adviser.

Always agree fees and negotiate theengagement letter before appointment

This may seem patronizing nonsense! Of course, everyone would always do this

– but they don’t.

Clients treat solicitors with undue respect, to the point that they do not even

raise the subject of fees. This is nonsense. A solicitor will respect you much more

if you talk openly about fees at the first meeting and are ready to negotiate.

Major accountancy firms often have onerous letters of engagement. Recently,

one accountancy firm told a prospective client that work should commence and

the engagement letter could be agreed later. What nonsense! No less than 17

amendments were made prior to their appointment, albeit reluctantly on their

part.



Telephone references on individual advisers really are valuable

Questions to be asked of the lead adviser should include:

• May I have the name, job title and telephone number of three clients

for whom you have completed deals, if I decide in principle to appoint

you?

• Will you be present at every meeting I wish you to be?

• What will happen if you are on holiday or ill?

• Who else will be in your team and what is their role?

• What is your fee proposal?

Questions to be asked of previous clients include:

• Did the adviser personally lead the team for you and attend meetings

when you felt it appropriate?

• Did you get an outstanding deal, first class service and value for money?

• What things annoyed or irritated you?

• Would you unhesitatingly appoint the adviser again?

• How should I get the best out of the adviser?

• How enjoyable was it to work with the adviser?

Chemistry and style are truly important and this will become apparent during

long, tedious and contentious negotiation meetings.

Ensure advisers keep you informed of progress

Too many advisers simply fail to keep you informed of progress or the lack of

it. This is simply not good enough. Ask each lead adviser to telephone or email

you weekly. The old adage of no news is good news does not apply to successful

business acquisitions!

In particular, the momentum needs to be maintained between signing Heads

of Agreement and legal completion. Make sure either your lead corporate finance

adviser or a senior in-house executive steers the deal safely to legal completion.



I conclude with a sobering thought, you will not know whether your acquisi-

tion is a success until one or two years after legal completion, and I wish you

every success.



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• The degree to which you may lawfully moni-tor your employees’ e-mail and Internet use

• The implications of the Regulation of Investi-gatory Powers Act 2000 and the ElectronicCommunications Act 2000

• How the Data Protection Act 1998 affects thedegree to which you can monitor your staff

• What you need to watch for in the HumanRights Act 1998 and TUC guidelines.

Freedom of Information Act


ISBN: 978-185418347-7

The FOI Act gives companies and individualsimportant powers to request information frompublic bodies. Are you equipped to take advan-tage and to protect yourself?

International Commercial Agreements

Attree, Rebecca £95

ISBN: 978-185418286-9

A major report on recent changes to the law andtheir commercial implications and possibilities. Thereport explains the principles and techniques ofsuccessful international negotiation and providesa valuable insight into the commercial points tobe considered as a result of the laws relating to:pre-contract, private international law, resolvingdisputes (including alternative methods, such asmediation), competition law, drafting commonclauses and contracting electronically. It alsoexamines in more detail certain specific interna-tional commercial agreements, namely agency anddistribution and licensing.

BUSINESS AND COMMERCIAL LAW

Other specially commissioned reportsfrom Thorogood

For full details of any title, and to viewsample extracts, please visit:

www.thorogoodpublishing.co.uk

Intellectual Property Protection andEnforcement

Brazell, Lorna £159

ISBN: 978-185418054-4

Incorporating the latest developments in IP law,this report reviews each of the principal forms ofintellectual property right available in the UnitedKingdom, describing the nature of the right itselfand explaining: How rights arise or can beobtained, How rights can be exploited, What isnecessary to protect rights from erosion or loss,What actions will constitute infringement of aright, under either civil (enforced by the owner)or criminal (enforced by public authorities) law,What remedies are available to the owner of theright, once infringement has been proved.

Each chapter can be read on its own for conven-ient reference, and the introduction to each chapteralso makes it clear where awareness of anothersection may be useful.

Waste Management: The changing legislative climate

Hand, Caroline £80

ISBN: 978-185418367-5

This valuable report explains what all the new leg-islation, directives and regulations mean in practiceand what you need to do to stay within the law.Recent far-reaching changes to the law and prac-tice affect everyone – commerce and industry,central and local government and householders.

Websites and the Law


ISBN: 978-185418331-6

Is your company/client website legal? Do you knowwhat information you are required by law to puton it? What can you do with people’s personal datasent to your website? This report deals with all thepractical legal issues which arise with websites –both those sites which sell goods or services andthose which advertise.

Insights into Successfully Managing the In-house Legal Function

O’Meara, Barry £95

ISBN: 978-185418174-9

Negotiating the fault-line between private prac-tice and in-house employment can be tricky, as thescope for conflicts of interests is greatly increased.Insights into successfully managing the in-houselegal function discusses these and other issues.

Software Contract Agreements

Bond, Robert £80

ISBN: 978-185418146-6

Fully up-to-date with all changes to the law, thisreport is a thorough explanation of the law com-bined with expert guidance on negotiating anddrafting the best contract for your client.

Achieving Business Excellence, Qualityand Performance Improvement

Chapman, Colin & Hopper, Dennis £95

ISBN: 978-185418018-6

This valuable report identifies all the areas criticalto developing an effective performance improve-ment process. It is a practical guide to the use ofbusiness excellence models and frameworks,quality standards, benchmarking tools, self-assess-ment programmes and the latest performanceimprovement initiatives.

The Commercial Exploitation ofIntellectual Property Rights by Licensing

DesForges, Charles £95

ISBN: 978-185418285-2

This report will show you – whether as licensoror licensee – how to identify and secure profitableopportunities, strategies and techniques for negoti-ating the best agreement, and finally the techniquesof successfully managing a license operation.

Please see order form at the back of this reportHOW TO ORDER

Email: [email protected]

Telephone: +44 (0)1235 465 500

Fax: +44 (0)1235 465 556

Post: Marston Book Services, PO Box 269Abingdon, Oxon OX14 4YN

Web: www.thorogoodpublishing.co.uk

Understanding SMART Procurement inthe MOD

Boyce, Tim £69

ISBN: 978-185418164-0

The main thrust of this report is on issues to dowith strategy, organisation and processes. Thesingle most encouraging and exciting feature ofthe SMART procurement initiative is that itembraces the need to change the culture. Thereis a commitment within the high political echelonof the MoD to make this change happen. Probablythe greatest single challenge is to ensure that thiscommitment is maintained through the inevitablechanges of personality at the political and seniormanagement level.

IT Governance

Norfolk, David £169

ISBN: 978-185418371-2

This specially commissioned report sets out whatthe latest legislation says and what it means, itsimpact on the organisation as a whole and on theIT group specifically, and how to implement aneffective IT governance initiative in your company.

Practical Techniques for Effective Project Investment Appraisal

Tiffin, Ralph £99

ISBN: 978-185418099-5

How to ensure you have a reliable system in place.Spending money on projects automatically neces-sitates an effective appraisal system – a way ofdeciding whether the correct decisions on invest-ment have been made.

Project Risk Management: The commercial dimension

Boyce, Tim £95

ISBN: 978-185418257-9

This report will show you how to fully appreciateall the commercial dimensions of important proj-ects and understand how to identify all the risksduring the pre-contract bidding phase.

A Practical Guide to KnowledgeManagement

Brelade, Sue & Harman, Chris £99

ISBN: 978-185418230-2

An expert but jargon-free guide to enable you tomanage the knowledge in your organisationsuccessfully and to identify, gather and use thatknowledge to maximum advantage.

Analyse your Business – A performancehealth check

O’Connor, Carol £89

ISBN: 978-185418170-1

This briefing offers the tools and techniques forcompany-wide analysis and is essential readingfor business leaders responsible for corporate per-formance. Its purpose is to put minor issues intoperspective and discourage the use of quick fixsolutions for bigger problems.

Tendering & Negotiating MoD Contracts

Boyce, Tim £95

ISBN: 978-185418276-0

This report aims to draw out the main principles,processes and procedures involved in tenderingand negotiating MoD contracts. As Tim Boycewrites in the Introduction, ‘it is important to realisethat the SPI embraces a conceptual shift in the roleof the MoD procurers’.

What does this ‘huge shift in thinking’ mean forcontractors? How exactly has the role of MoDpurchasing changed? This report covers everyaspect of competitive tendering, negotiation andcontractual negotiations in this new era. There canbe few people who combine Tim Boyce’s experi-ence and expertise with a gift for explaining issuesand procedures with such clarity.



BUSINESS STRATEGY AND MANAGEMENT

Surviving a Corporate Crisis: 100 things you need to know

Batchelor, Paul £80

ISBN: 978-185418208-1

Seven out of ten organisations that experiencea corporate crisis go out of business within 18months. This report not only covers remedialaction after the event but offers expert advice onpreparing every department and every key playerof the organisation so that, should a crisis occur,damage of every kind is limited as far as possible.

Technical Aspects of Business Leases:Overcoming the practical difficulties

Dowden, Malcolm £95

ISBN: 978-185418194-7

The purpose of this report is to highlight areaswhere technical issues might lead to practical dif-ficulties, and to give clear guidance to help thoseinvolved in property management avoid the pitfalls.

Strategy Implementation ThroughProject Management

Grundy, Tony £99

ISBN: 978-185418250-0

The gap: Far too few managers know how to applyproject management techniques to their strate-gic planning. The result is often strategy that ispoorly thought out and executed.

The answer: Strategic project management is anew and powerful process designed to managecomplex projects by combining traditional busi-ness analysis with project management techniques.

FINANCE

Tax Planning for Businesses and their Owners

Hughes, Peter £95

ISBN: 978-185418334-7

Written for business owners and managers, thisspecial briefing offers expert advice on the taximplications of your business decisions – guidingyou in making the right business and personalchoices for tax reduction.

Trade Secrets of Business Disposals

Pearson, Barrie £145

ISBN: 978-185418321-7

If you’re like most people, you’ll only get onechance to sell your business and to capitalise onyears of hard work and planning. You can eitherfluff it, or make sure you get the best possible advi-sor and become financially secure for life, andpossibly very rich. This report shows you how tomake your business ‘investor-ready’ for maximumcapital return.

Trade Secrets of Successfully AcquiringUnquoted Companies

Pearson, Barrie £145

ISBN: 978-185418366-8

In this invaluable new briefing one of the City’s mostsuccessful deal-makers distils 40 years’ experienceas both principal and advisor. “Losing a deal byadopting the wrong tactics is unforgiveable” hewrites, but it happens all too often. This briefing offersboth professional advisors and principals the oppor-tunity to transform their rate of success, clarifyinghard truths and highlighting avoidable mistakes. Itis laced throughout with proven tactical advice toensure that both deals and post-acquisition manage-ment are carried out with maximum success.

VAT Liability and the Implications ofCommercial Property Transactions

Buss, Tim £149

ISBN: 978-185418307-1

The option to tax is a major VAT planning tool butyou have got to get the detail right to take fulladvantage – and getting it wrong can be verycostly. This report shows you how to plan for max-imum advantage and avoid costly mistakes.

THE THOROGOOD PROMISE

If you are not totally satisfied and you return a publication in mint condition within 14 days

of receipt, we will refund the cost of thepublication, no questions asked.

Data Protection Law for Employers


ISBN: 978-185418283-8

The four-part Code of Practice under the Data Pro-tection Act 1998 on employment and dataprotection places a further burden of responsibil-ity on employers and their advisers. The DataProtection Act also applies to manual data, not justcomputer data, and a tough enforcement policywas announced in October 2002.

Discrimination Law and Employment Issues

Martin, David £55

ISBN: 978-185418339-2

The Age Discrimination Act is billed by lawyersas the most significant change in employment lawsince the 1970’s. In addition to sex and race dis-crimination laws, in the last two years employershave also had to cope with sexual orientation dis-crimination and religious discrimination. DavidMartin, an expert on employment law and prac-tice, analyses the practical aspects of dealingwith each of the anti-discrimination laws. Hedemonstrates how to ensure that paperwork andsystems comply totally with the law, and he pro-vides a range of helpful case studies to illustratethe key issues and bring them to life.

Effective Recruitment: A practical guideto staying within the law

Leighton, Patricia & Proctor, Giles £85

ISBN: 978-185418303-3

The ways to undertake the task continue to grow,making the decision as to how best to recruit fora given employment situation more complex.This specialist text is responding to a number ofimperatives, including legal ones. There havebeen, and are, anticipated changes that make itessential that recruitment practitioners act botheffectively and within the law.

Employee Sickness and Fitness for Work: Successfully dealing with the legal system

Howard, Gillian £95

ISBN: 978-185418281-4

Many executives see employment law as an obsta-cle course or, even worse, an opponent – but it cancontribute positively to keeping employees fit andproductive. This report will show you how to getthe best out of your employees, from recruitmentto retirement, while protecting yourself and yourfirm to the full.

Employment Law Aspects of Mergersand Acquisitions: A practical guide

Ryley, Michael £95

ISBN: 978-185418363-7

This Report will help you to understand the keypractical and legal issues, achieve consensus andinvolvement at all levels, understand and implementTUPE regulations and identify the documentationthat needs to be drafted or reviewed within the con-text of a merger, acquisition or disposal.






EMPLOYMENT LAW

Need it now? Download a PDF of the reportat: www.thorogoodpublishing.co.uk

Navigating Health and Safety Law:Ensuring compliance and minimising risk

Pope, Chris £95

ISBN: 978-185418353-8

If you have already been challenged by the insurer,inspector, or one of your workforce about the sta-tus of your health and safety this report will giveyou a workable answer to questions like Is my healthand safety policy legally compliant? How do I avoidbeing liable for an employees ill health arising fromprevious employment? Who should carry outsafety inspections – is it my responsibility?

Successfully Defending EmploymentTribunal Cases

Hunt, Dennis £95

ISBN: 978-185418267-8

Sweeping changes to the way employment tribu-nal claims are dealt with have increased the riskof higher costs and more expensive claims. Thisindispensable report covers all the changes andtheir implications for HR professionals.

Please see order form at the back of this reportHOW TO ORDER


Telephone: +44 (0)1235 465 500

Fax: +44 (0)1235 465 556

Post: Marston Book Services, PO Box 269Abingdon, Oxon OX14 4YN


HR, RECRUITMENT AND TRAINING

Applying the Employment Act 2002:Crucial developments for employers and employees

Williams, Audrey £95

ISBN: 978-185418253-1

The Act represents a major shift in the commer-cial environment, with far-reaching changes foremployers and employees. The consequences ofgetting it wrong, for both employer and employee,will be considerable – financial and otherwise. TheAct affects nearly every aspect of the workplace.

Dismissal and Grievance Procedures

Hunt, Dennis £95

ISBN: 978-185418376-7

This report explains what all the regulations sayand what steps you need to take to operate effec-tive dismissal, disciplinary and grievanceprocedures. It covers all the requirements of theDisputes Resolution Procedures that came intoeffect in October 2004. It tells you where and whenthe regulations apply – and what you need to do.

Enabling Beyond Empowerment

Williams, Michael £95

ISBN: 978-185418084-1

By applying the range of practical managementtechniques detailed in this report, you can providethe authority and means to empower in a way thatsubstantially reduces the dangers.

Flexible Working

Williams, Audrey £95

ISBN: 978-185418306-4

Recent research shows that far too many individ-uals, as well as firms, are unaware of flexibleworking rights. How employers and employeesdeal with them is of crucial – and increasing –importance to both. This report clarifies the law,sets out the rights of employer and employee, andoffers valuable practical advice on best practice.








How to Turn your HR Strategy into Reality

Grundy, Tony £85

ISBN: 978-185418183-1

From a diagnosis of HR issues to an analysis ofthe external and internal future environment ofyour company and the effect on your humanresources – this is practical information aimed atHR and senior line managers.

Internal Communications

Farrant, James £95

ISBN: 978-185418149-7

There is growing evidence that the organisationsthat ‘get it right’ reap dividends in corporateenergy and enhanced performance. In theseorganisations, internal communications have equalstatus with the external communications functions.This practical report will show you how internalcommunications, taken in their widest sense, canimprove the performance of organisations.

Mergers and Acquisitions: Confrontingthe organisation and people issues

Thomas, Mark £95

ISBN: 978-185418008-7

Why do so many mergers and acquisitions end intears and reduced shareholder value? This reportwill help you to understand the key practical andlegal issues, achieve consensus and involvementat all levels, understand and implement TUPE reg-ulations and identify the documentation that needsto be drafted or reviewed.

New Ways of Working

Jupp, Stephen £99

ISBN: 978-185418169-5

New ways of working examines the nature of thework done in an organisation and seeks to opti-mise the working practices and the whole contextin which the work takes place. It is more aboutpromoting the best ways of doing things than sim-ple cost driven change. Although it emphasisesthe importance of business and organisation, itspans the concerns of people, property, technol-ogy, community and environment.

Power Over Stress at Work

Araoz, Daniel £99

ISBN: 978-185418176-3

The HR manager can learn how to deal creativelywith stress from the information in this briefingand pass on their knowledge down the ranks. Heor she will then halt the downward spiral of dif-fusing stress and produce a more positive knock-oneffect – namely to increase the productivity of theentire workforce and reduce absenteeism result-ing from this terrible illness.

Reviewing and Changing Contracts of Employment

Phillips, Annelise; Player, Tom & Rome, Paula £95

ISBN: 978-185418296-8

The Employment Act 2002 has raised the stakes.Imperfect understanding of the law and poor draft-ing will now be very costly. This report will:

• Ensure that you have a total grip on what shouldbe in a contract and what should not

• Explain step by step how to achieve changesin the contract of employment without causingproblems

• Enable you to protect clients’ sensitive businessinformation

• Enhance your understanding of potentialconflict areas and your ability to managedisputes effectively.

Trade Secrets of Using e-Learning in Training

Bray, Tony £95

ISBN: 978-185418326-2

Definitely not for ‘techies’, this report is practicaland jargon-free – giving you step-by-step skills andprocesses to enable you to design effective e-learn-ing products with confidence.

Transforming HR

Hunter, Ian and Saunders, Jane £95

ISBN: 978-185418361-3

The blue-print for the future of HR – how to deliverproven value to your Board, business and col-leagues. The report is based on interviews with 60HR leaders from across industry and public andnot for profit sectors. The report covers HR out-sourcing and shared services.

THE THOROGOOD PROMISEIf you are not totally satisfied and you return a publication inmint condition within 14 days of receipt, we will refund the

cost of the publication, no questions asked.

MARKETING, PR AND SALES

Insights into Understanding theFinancial Media: An insider’s view

Scott, Simon £99

ISBN: 978-185418083-4

This briefing will help you understand the way thefinancial print and broadcast media works in theUK. It will also provide you with techniques andguidelines on how to communicate with the finan-cial media in the most effective way, to help youachieve accurate and positive coverage of yourorganisation and its operations.

Lobbying and the Media: Working withpoliticians and journalists

Burrell, Michael £99

ISBN: 978-185418240-1

Lobbying is an art form rather than a science, sothere is inevitably an element of judgement in whatline to take. The best lobbying is always based onaccurate, up-to-date information and on a well-argued case, founded on credible evidence, anddelivered to the right audiences in the right toneof voice at the right time. Sounds simple, but it isn’t.This expert report explains the knowledge andtechniques required.

Corporate Community Investment

Genasi, Chris £99

ISBN: 978-185418192-3

Supporting good causes is big business – and goodbusiness. Corporate community investment (CCI)is the general term for companies’ support of goodcauses, and is a very fast growing area of PR andmarketing.

Defending your Reputation

Taylor, Simon £99

ISBN: 978-185418251-7

‘Buildings can be rebuilt, IT systems replaced, peo-ple can be recruited, but a reputation lost can neverbe regained…The media will publish a story – youmay as well ensure it is your story’ Simon Taylor.‘News is whatever someone, somewhere, does notwant published’ William Randolph Hearst Whena major crisis does suddenly break, how ready willyou be to defend your reputation?

Implementing an Integrated MarketingCommunications Strategy

Hart, Norman £99

ISBN: 978-185418120-6

Get ahead and stay ahead of your competitionthrough better integration of your marketing com-munications. Norman Hart was an internationalconsultant, lecturer and author on marketing,advertising and public relations. His booksincluded The CIM Marketing Dictionary, Strate-gic Public Relations, The Practice of Advertisingand Industrial Marketing Communications.

Managing Corporate Reputation: The new currency

Dalton, John & Croft, Susan £95

ISBN: 978-185418272-2

ENRON, WORLDCOM… who next? At a timewhen trust in corporations has plummeted to newdepths, knowing how to manage corporate rep-utation professionally and effectively has neverbeen more crucial. This report shows you how to:

• Develop PR, brands and relationship manage-ment as the vanguards of your corporatereputation

• Strengthen your internal as well as externalcommunications

• Improve the effective management of yourstakeholders

Practical Techniques for Effective Lobbying

Miller, Charles £95

ISBN: 978-185418089-6

Understanding the system and the process inwhich it works is essential to lobbying effectively.Uncoordinated, uncontrolled and badly plannedapproaches will do more harm than good, and riskantagonising the people you most want to influ-ence. This report provides the techniques requiredfor effective lobbying.

Public Affairs Techniques for Business

Wynne-Davies, Peter £95

ISBN: 978-185418175-6

This report shows in practical terms how you cancounter potential threats through a professionallystructured and implemented public affairs cam-paign. Today’s successful companies recognise thatin order to survive and prosper a comprehensiveand disciplined approach to public affairs is nolonger just a useful asset, it is now a necessity.

Selling Skills for Professionals

Tasso, Kim £99

ISBN: 978-185418179-4

Many professionals still feel awkward about reallyselling their professional services. They are not usu-ally trained in selling. This is a much-needed reportwhich addresses the unique concerns of profes-sionals who wish to sell their services successfullyand to feel comfortable doing so.

Strategic Customer Planning

Melkman, Alan & Simmonds, Ken £95

ISBN: 978-185418388-0

This is very much a ‘how to’ report. After read-ing those parts that are relevant to your business,you will be able to compile a powerful customerplan that will work within your particular organ-isation for you. Charts, checklists and diagramsthroughout.

Strategic Planning in Public Relations

Knights, Kieran £99

ISBN: 978-185418225-8

Tips and techniques to aid you in a new approachto campaign planning. Strategic planning is a freshapproach to PR. An approach that is fact-basedand scientific, clearly presenting the arguments fora campaign proposal backed with evidence. Thisreport provides valuable tips and techniques toimprove your PR and campaign planning.

Successful Competitive Tendering

Woodhams, Jeff £95

ISBN: 978-185418235-7

To win business, you must make a convincing case.This report will help you become more skillful, andmore successful in your tendering.

Techniques for Ensuring PR Coveragein the Regional Media: An insider’s view

Imeson, Mike £99

ISBN: 978-185418019-3

This in-depth briefing will give you the tools andtechniques you need to enjoy the opportunitiesoffered by the regional and local media. It offersyou practical guidance and advice on how toapply them with maximum effect for your nextPR campaign.



Title ISBN Price Authors Qty

Commercial Contracts: Drafting techniques and precedents 978-185418271-5 £169 Ribeiro, Robert

Commercial Litigation: Damages and other remedies for breach of contract 978-185418397-2 £169 Ribeiro, Robert

Corporate Governance 978-185418354-5 £85 Martin, David

Email: Legal issues 978-185418256-0 £80 Singleton, Susan

Freedom of Information Act 978-185418347-7 £95 Singleton, Susan

International Commercial Agreements 978-185418286-9 £95 Attree, Rebecca

Insights into Successfully Managing the 978-185418174-9 £95 O’Meara, BarryIn-house Legal Function

Software Contract Agreements 978-185418146-6 £80 Bond, Robert

Achieving Business Excellence, Quality and 978-185418018-6 £95 Chapman, ColinPerformance Improvement & Hopper, Dennis

The Commercial Exploitation of Intellectual 978-185418285-2 £95 DesForges, Property Rights by Licensing Charles

Intellectual Property Protection and Enforcement 978-185418054-4 £159 Brazell, Lorna

Waste Management: The changing legislative climate 978-185418367-5 £80 Hand, Caroline

Websites and the Law 978-185418331-6 £80 Singleton, Susan

A Practical Guide to Knowledge Management 978-185418230-2 £99 Brelade, Sue & Harman, Chris

Analyse your Business – A performance health check 978-185418170-1 £89 O’Connor, Carol

Tendering & Negotiating MoD Contracts 978-185418276-0 £95 Boyce, Tim

Understanding SMART Procurement in the MOD 978-185418164-0 £69 Boyce, Tim

IT Governance 978-185418371-2 £169 Norfolk, David

Practical Techniques for Effective Project 978-185418099-5 £99 Tiffin, Ralph Investment Appraisal

Project Risk Management: The commercial dimension 978-185418257-9 £95 Boyce, Tim

Strategy Implementation Through Project Management 978-185418250-0 £99 Grundy, Tony

Surviving a Corporate Crisis: 100 things you need to know 978-185418208-1 £80 Batchelor, Paul

Technical Aspects of Business Leases: 978-185418194-7 £95 Dowden, Overcoming the practical difficulties Malcolm

Tax Planning for Businesses and their Owners 978-185418334-7 £95 Hughes, Peter

Trade Secrets of Business Disposals 978-185418321-7 £145 Pearson, Barrie

Order Form

FIVE WAYS TO ORDER:


Tel: +44 (0)1235 465 500

Fax: +44 (0)1235 465 556

Post: Marston Book Services, 10-12 Rivington Street,London EC2A 3DU


THE THOROGOOD PROMISEIf you are not totally satisfied and you return a publication inmint condition within 14 days of receipt, we will refund the

cost of the publication, no questions asked.


Trade Secrets of Successfully Acquiring 978-185418366-8 £145 Pearson, BarrieUnquoted Companies

VAT Liability and the Implications of 978-185418307-1 £149 Buss, TimCommercial Property Transactions

Data Protection Law for Employers 978-185418283-8 £80 Singleton, Susan

Discrimination Law and Employment Issues 978-185418339-2 £55 Martin, David

Effective Recruitment: 978-185418303-3 £85 Leighton, PatriciaA practical guide to staying within the law & Proctor, Giles

Employee Sickness and Fitness for Work: 978-185418281-4 £95 Howard, GillianSuccessfully dealing with the legal system

Employment Law Aspects of Mergers and Acquisitions: 978-185418363-7 £95 Ryley, MichaelA practical guide

Navigating Health and Safety Law: 978-185418353-8 £95 Pope, ChrisEnsuring compliance and minimising risk

Successfully Defending Employment Tribunal Cases 978-185418267-8 £95 Hunt, Dennis

Applying the Employment Act 2002: 978-185418253-1 £95 Williams, AudreyCrucial developments for employers and employees

Dismissal and Grievance Procedures 978-185418376-7 £95 Hunt, Dennis

Enabling Beyond Empowerment 978-185418084-1 £95 Williams, Michael

Flexible Working 978-185418306-4 £95 Williams, Audrey

How to Turn your HR Strategy into Reality 978-185418183-1 £85 Grundy, Tony

Internal Communications 978-185418149-7 £95 Farrant, James

Mergers and Acquisitions: Confronting the organisation 978-185418008-7 £95 Thomas, Markand people issues

New Ways of Working 978-185418169-5 £99 Jupp, Stephen

Power Over Stress at Work 978-185418176-3 £99 Araoz, Daniel

Reviewing and Changing Contracts of Employment 978-185418296-8 £95 Phillips, Annelise; Player, Tom & Rome, Paula

Trade Secrets of Using e-Learning in Training 978-185418326-2 £95 Bray, Tony

Transforming HR 978-185418361-3 £95 Hunter, Ian and Saunders, Jane

Corporate Community Investment 978-185418192-3 £99 Genasi, Chris

Defending your Reputation 978-185418251-7 £99 Taylor, Simon

Implementing an Integrated Marketing 978-185418120-6 £99 Hart, NormanCommunications Strategy

Insights into Understanding the Financial Media: 978-185418083-4 £99 Scott, SimonAn insider’s view

Lobbying and the Media: Working with politicians 978-185418240-1 £99 Burrell, Michaeland journalists

Managing Corporate Reputation: The new currency 978-185418272-2 £95 Dalton, John & Croft, Susan




Practical Techniques for Effective Lobbying 978-185418089-6 £95 Miller, Charles

Public Affairs Techniques for Business 978-185418175-6 £95 Wynne-Davies, Peter

Selling Skills for Professionals 978-185418179-4 £99 Tasso, Kim

Strategic Customer Planning 978-185418388-0 £95 Melkman, Alan & Simmonds, Ken

Strategic Planning in Public Relations 978-185418225-8 £99 Knights, Kieran

Successful Competitive Tendering 978-185418235-7 £95 Woodhams, Jeff

Techniques for Ensuring PR Coverage in 978-185418019-3 £99 Imeson, Mikethe Regional Media: An insider’s view

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Trade Secrets of Successfully Acquiring Unquoted Companies

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