In many cases, the customer list is the principal item being acquired, so buyers want to be assured that the customers are legitimate before they hand over a cheque
In many divestitures, there is at least one major problem between the letter of intent and the close.
The key to completing the deal is understanding the issue, determining its merits and coming up with a solution that works for both vendor and buyer.
I have seldom found that buyers want a business so badly that they will ignore a pertinent issue, or that vendors want to sell so badly that they will accept a term that is not fair.
However, in most cases both sides will accept a solution that is fair. Outlined below are several issues I have found over the years and how they were solved.
•Due diligence – verifying customers. I have dealt with several business services companies where there is a large number of repeat customers who have contracts in place. The vendor is very hesitant to provide a list of these customers with billing details, particularly to a competitor. In many cases, the customer list is the principal item being acquired, so buyers want to be assured that the customers are legitimate before they hand over a cheque. We have handled this issue in two ways. One approach is to provide a customer list with monthly sales but no names or sale details. Another approach is to have the buyer’s accountant execute an undertaking to not release any names or details to the purchaser but allow them access to the customer list for verification.
•Performance changes during due diligence. There are cases where market changes occur during due diligence that could affect the profitability of the business. I was involved in a case where part of the business was selling scrap material. During due diligence, the market price for this scrap product decreased by 10% to 20%. The buyer was calling for a price adjustment to reflect this. The vendor stated that price fluctuations were always occurring and that the price that was in effect at the time of the deal was a better average of market pricing than the current low price. Both positions had merit. Part of the purchase price was to be paid over a three-year period. The solution in this case was coming up with a formula for the scrap part of the business. If pricing stayed at the low mark there would be a price deduction, but if pricing increased, the price deduction would be reduced or eliminated.
•Definitions in the buy-sell documents: severance. I have been involved in deals where the purchased business is being combined with a complementary operation resulting in some employees not staying with the new company. In most cases, the vendor is responsible for any severance costs. However, in one case I had the buyer wanting the severance clause to apply to any person who is affected by the acquisition, including people in the purchasing company. For example, if someone were brought over from the vending company to the new company and that person were ultimately promoted to replace an existing employee in the purchasing company, then the vendors would be responsible for that severance as well. This would result in the vendor having an unknown liability for an indefinite period. We determined that this request was unfounded and was the purchaser’s way of obtaining a price adjustment.
It is important in both acquisitions and divestitures that the parties have engaged advisers who have the experience to identify whether issues have merit or are part of negotiating. The advisers also need the creativity to come up with a solution that works for both sides when justified.
Doug Cruikshank ([email protected]) is president of the Cruikshank Advisory Group and founder, past president and director of ACG British Columbia. He has worked in the mergers and acquisitions field for more than 30 years.
