While deciding to acquire a company, there are many questions arising : will this acquisition be profitable to the existing business? Will the medium and long term projection be achieved ? How sustainability in terms of results and management will be ensured ? In the first part of the article, the process of evaluation will be analyzed (1.) and the second part will be dedicated to the transition of the corporate governance (2.).
- Evaluation process of the company or the branch to be acquired
Evaluating the opportunity to acquire a company or a branch requires extensive knowledge and understanding. There are legal, tax and financial aspects for instance that may give a clear direction for the valuation. At the same time, there are some aspects, most of them intangible, that are taken into account. The first step is to proceed with a due diligence of the company to be acquired (1.1). After the completion of the due diligence, and once all the documents are obtained, financial evaluation can be done (1.2). All these steps allow the definition of a price for the acquisition (1.3).
1.1 Due diligence of the company
The due diligence is a deep analysis of the company to be acquired from the incorporation until today. Between all the aspects and documents to be taken into consideration and to analyze, there are two sort of assets: tangible assets (a.) and intangible assets (b.).
a. Tangible assets
These are expressed through tangible documents such as corporate documents, agreements, balance sheet, tax returns, payslips, bank extracts, brands registration.
These documents may vary depending on the business of the company.
We can briefly resume the basic documents :
- Corporate documents such as articles of association and certificate of incorporation along with an update excerpt allow to assess that the company is validly incorporated and existing;
- After that, through the minutes of the shareholders and of the board of directors it is possible to ensure that the company takes the proper decisions;
- Balance sheets is the mirror of the activity of the company : through the analysis of financial statements it is possible to understand if the company has a serious obstacle;
- Agreements with clients and suppliers allow to understand if the company is performing under the best conditions;
- The compliance with tax duties may be assessed through tax returns and VAT declarations;
- Labor contracts and payslips allow to assess the existence of particular clauses with the employees and financial policy applied to them;
- Another important point is the existence of brand registration and patents that protect the know-how of the company.
While doing a due diligence, there are considerations that may come into the mind: are the corporate file of the company in good order and financial balance sheets approved into deadlines? The accuracy of keeping corporate and financial files of the company is one of the key factor that will influence the future evaluation.
One another point is if the agreements with partners and suppliers are in good order.
There may be other regulatory aspects to be taken into account such as privacy policies applied and anti-money laundering duties.
b. Intangible assets
Besides tangible assets, there will be other «intangible» assets that will be taken into account and will influence the evaluation of the company.
For instance, the company’s culture in terms of value may be a very important factor, depending on the nature of the business.
The communication and marketing policy of the company linked to the brand may be fundamental.
Another key point may be the management of the employees, in particular their seniority and their performance.
1.2 Financial evaluation
The due diligence allow a proper financial evaluation of the company.
We will briefly remind that the evaluation is done by taking into account different factors:
- the type of the company and the type of industry by including a market analysis;
- the income statement or the balance sheet in other words the financial performance;
- Factors as liquidity, solvency and profitability ;
- Intellectual property assets;
- ESG rules;
- Corporate governance rules.
Financial evaluation shall take into account all these aspects, whether they are tangible or intangible.
1.3 Defining a price for the acquisition
Once the due diligence and the financial evaluation are terminated, the step of defining the price to propose arrives.
This task, especially for the acquiring party may be very difficult. How can I trust advice of the professionals and their rational behavior?
At this point there can be irrational expectations and opinions that influence the acquiring party to fix the price, while it is clear that the first proposal of price will have a strong impact on all the negotiation process.
Once this step is done and the negotiation process is in due course, the behavior of the other party will be an important factor to define the transition of the corporate governance.
As a matter of fact, ensuring a proper transition in term of corporate governance will contribute to the sustainability of the business and the performance.
- Ensuring a proper transition of the corporate governance
The role of the board of directors and the drafting of the purchase agreement and ancillary contracts are important factors to facilitate a smooth transition of the corporate governance.
2.1 The role of the board of directors
Since the due diligence, the behavior of the board of directors will be analyzed and taken into account.
While doing the due diligence and understanding how the company has been managed, every single aspects from the most tangible to the most intangible will be considered.
The crucial point is whether the board of directors has acted in good faith and for the best interest of the company globally and in every single aspects.
Besides legal aspects, such as the powers of every member of the board and the requested performances by the shareholders, the day to day management is crucial for :
- the evaluation of the company and the definition of the price : does the company has proper files ? does the company has pending judicial litigation with suppliers, clients and employees? How does the board of directors act and react in line with financial capacity of the company and regulatory duties ?
- The conduction of the negotiations: is the board of directors trusted by the acquiring party in the negotiation process?
2.2 Drafting purchase agreements
One another key point to allow proper transition in corporate governance is the drafting of clauses combining the need of stability, growth and unpredictable events.
Besides a sale and purchase agreement containing specific clauses of the governance and performance, there may be side agreements between the shareholders and/or the parties.
Without going into details, the main question arising is how the transition will last and if it is possible to lock all the aspects such as financial performance, HR management, communication to the clients and suppliers: Every single aspect need a different analysis and have a different answer.
Conclusion
Assisting clients in the acquisition process may be complex and requires specific and technical skills.
From the evaluation process, after a deep due diligence analysis, until the fixation of the price to purchase, there may by various factors that influence the opinion and the strategic choices of an acquisition. Then, capability to understand and predict short and medium term solutions are essential to be able to draft everlasting agreements. Besides, the role of the board of directors is central on guarantying an efficient corporate governance.