Transactional Risk In Business Sales
Business sales are complex, and no two are the same – we all know this. Because of this, many sales fail and leave a very disappointed seller and buyer. Even when an advisor is familiar with the type of challenges that occur most regularly, there will always be issues which are unique to that particular sale and which can cause it to fail.
In the case of one client, the unique challenge which nearly caused the failure of their sale was related not to either the buyer or seller’s company, but to that of another complementary company that was being purchased at the same time. This is a rare occurrence in the world of business sales, however it proved to be a detrimental transactional risk to the sale.
Few buyers have the resources to make two acquisitions at the same time, yet in this case a third company became available that proved to be far too good to pass up for our buyer.
But how did this affect our client’s business sale? In this unique instance, the buyer was looking to merge the two companies it had acquired and aimed to help them to grow together as one business.
However, in many sale and purchase agreements, there are performance related targets and associated payments and this was one such example. However, our client overlooked the impact and transactional risk this second acquisition could have on the financial performance of his company. In such a unique situation, anyone could be forgiven for overlooking this potential issue, but we did not.
We recognised the transactional risks and the potential financial implications of this double purchase and integration and recommended due diligence into the second company. When completed, this indicated that whilst it would likely provide a profit longer term, there would be significant overhead costs post completion, which could impact our client’s ability to generate additional performance related payments.
Essentially, our client’s company’s financial performance could have been negatively affected by the performance of the other company over which it had no previous knowledge and which also required further investment.
In view of this, we negotiated a change to the previously agreed sale purchase agreement to protect our client’s future revenue payments. Without doing so our client could have lost hundreds of thousands of pounds of performance related payments and it was only down to our expertise that this issue was highlighted and avoided.
There are a myriad of different transactional risks, some that can be mitigated through prior planning and strategy, just like in this case study.