Accountancy & Banking

Saffery Director Mark Kilbey looks at ‘Buying a business and things to consider’

By Mark Kilbey [email protected]

Published: November 6, 2023 | Updated: 6th November 2023

In this month’s Finance Matters, Saffery Director Mark Kilbey looks at ‘Buying a business and things to consider’.

We also get to meet staff member Laura Yeadon, Semi-Senior Tax. Prepare to be impressed by her Candy Crush ratings!

Buying a business can be a great way to grow an existing enterprise, or a faster and more secure way of starting a new one.

However, without proper planning, transactions can often fall through prior to completing or fail shortly after completion because of issues that could have been identified earlier in the process.

Here are some important factors that potential buyers should think about before, during, and after a transaction process.

Is the business a strategic fit?

A buyer’s wider strategic ambitions should inform its acquisition plans, and each potential acquisition opportunity should be critically assessed against more than just economic factors. Potential considerations include:

  • Will the acquisition expand the buyer’s geographical reach?
  • Are the brands and reputations of the two businesses aligned?
  • Does the acquisition represent a move into a new industry or service line?
  • Do potential synergies exist between the two businesses outside of pure cost savings?
  • Are the two businesses culturally compatible?
  • Do the two businesses operate similar systems and control environments?

These are all important considerations to reflect on before starting a transaction process.

Valuation of a business

Before entering into any negotiation and making a formal offer, forming a commercial view of how much the business is worth is essential.

The nature of the target business and the industry in which it operates can have an influence on the most appropriate valuation method. The target’s financial position, current trading and projected future earnings can all impact on the valuation outcome and therefore require careful consideration by an acquirer.

When using projected financial performance to determine valuation, it is important to ensure that forecasts are realistic, achievable, and that the underlying assumptions and drivers have been scrutinised and sensitised appropriately.

Typically where projections are key to valuation, we would expect appropriate protection against future underperformance against forecasts. This is commonly achieved through the use of an earn-out mechanism, which makes a certain proportion of total consideration contingent on forecast performance being achieved by a certain time or date.

Buy-side valuation services provide an independent analysis of the key drivers and issues underpinning the valuation of a business or part of a business. This analysis can form the basis of subsequent negotiations between the two parties in agreeing headline price and deal structure. Potential key risks to be reviewed in further detail during due diligence can also be identified at this stage.

Transaction structuring and post-completion considerations

It’s never too early to start planning. Once a target business has been identified, a buyer should be thinking about transaction structure and planning the terms of the deal, including:

  • What proportion of consideration will be upfront versus deferred, and
  • Whether an earn-out mechanism is appropriate, and any post-completion conditions.

It is also necessary to consider the structure of the transaction from a tax perspective, to ensure that the process is as tax efficient as possible for both parties.

Planning for how the business is to be operated post-completion is critical. Usually, a buyer will seek to retain key members of the existing management team to ensure a seamless transition and to minimise any disruption to trading.

When the target company is an owner-managed business, this will often involve retaining the outgoing shareholders and implementing service agreements for a period of time post-transaction.

It can be advisable to align this period to any agreed earn-out period to ensure that outgoing shareholders remain incentivised throughout the post-transaction period.

It is important to negotiate these arrangements and to set expectations with these individuals before completion, and to begin considering succession plans for these roles beyond the earn-out period.

To read the full article, visit Buying a business – things to consider.
For further advice, please contact Mark Kilbey at [email protected]  or Tel. 01202 204744

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Meet our staff

Name: Laura Yeadon

Role: Semi-Senior – Tax

Time at Saffery: 5 months

What’s the best bit about your job?

The opportunity to help clients save money and navigate complex tax regulations. It’s both intellectually challenging and rewarding to find smart strategies that benefit clients and their businesses.

The culture of Saffery Champness is really important to the business and the people within it – what do you think you bring to the team and what do you contribute?

The culture at Saffery is one of the things that appealed to me. I am an active and sociable person and keen to get involved in all things Saffery.

If you weren’t doing this role, what might you be doing?

I’d love to be a pizza taste tester. I know it’s niche, but someone’s got to do it!

What do you enjoy doing outside of work?

I love playing Netball and dancing. On a lazy day, I love reading a good thriller book and cuddling my cats.

Tell us something about yourself that we don’t know.

I don’t like to brag, but I’m in the top 4% of Candy Crush players. It took a lot of hard work, it wasn’t all fun and games.

Who or what inspires you?

I find inspiration in the sense of accomplishment that comes from working towards goals (no matter how small) and ultimately reaching them. Achieving milestones provides me with a sense of purpose and fulfilment that drives me forward.

What’s your favourite place in Dorset?

I grew up in Somerset, so I love that the beach is on my doorstep now. Any chance I can, I’m at the beach.

Give 3 words to describe yourself.

Passionate, friendly, sociable

Read next: Saffery Partner Jamie Lane discusses climate reporting and we meet Personal Tax Semi-Senior Jake Walsh

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