As a law firm that has acted for hundreds of buyers and sellers of businesses, we have learned that the timing of a transaction can be fundamental to its success or failure.
It is widely recognised that any sale transaction requires the selling business to be in a good state of repair, to have sound records, and to be able to illustrate not only its history but also that it is an asset likely to provide a positive return to a purchaser.
On the other side of that equation, the purchaser should ensure that the acquisition target displays the attributes and characteristics they seek and that the price paid is acceptable after considering the inherent risks of proceeding with such a transaction.
One thing that purchasers sometimes forget is that if financing arrangements are involved, the purchaser's confidence in the value of the acquisition or their beliefs about the financial returns that can be obtained may not always be shared by the entity financing the transaction.
Suppose the financing entity does not share that confidence. In that case, funds may not be made available, even if the purchaser has a sound credit history, has never been denied finance, has the ability to obtain the funding and even has external means by which it could accommodate repayments concerning that funding. If a bank or finance company don't like what they see in the target, they may not be prepared to take the financing risk.
On the question of timing, then, a purchaser must
- be very confident about their ability to raise finance
- be aware of the financier's requirements
- be able to provide financiers with the information they require to support the funding at the earliest possible opportunity and
- Do not incur too much expense until there is at least an agreement in principle about the financing arrangements - to do otherwise could mean that significant costs could be thrown away in preparatory work that ultimately proves unnecessary.
Of course, a transaction can be made "subject to finance", and the purchaser may be able to withdraw themselves from the arrangement if that finance is not granted. Consequences may flow from providing the purchaser with that right (including break fees or costs of the vendor being paid by the purchaser). It must be remembered, too, that contracts have been negotiated, prepared and exchanged, and the purchaser has already incurred the vast bulk of legal and accounting fees. Extraction from the contract may remove any legal obligation to proceed with the acquisition, but the cost of getting to that point will likely be significant.
As indicated above, this brief article is about timing. A preliminary conclusion is that a potential purchaser seeking to obtain funding for an acquisition should communicate early with the funding organisation and proceed when, at minimum, in principle, agreement about the funding and the target has been obtained.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.