20 corporate finance Making acquisitions work


It is widely acknowledged that c70% of acquisitions fail to deliver the anticipated benefits and at the smaller end of the M&A market this failure rate is higher, says Philip Mettam of Meridian Corporate Finance


While acquiring a business can help accelerate growth to increase revenues and profitability of your company, it is a complex process both before and after the deal. However, there are basic procedures that can be undertaken when looking at any potential acquisition which will enable you to determine whether or not it is the right route for the business.


Define your core objectives


Acquisitions can be made for a wide range of reasons but the most common ones are: to increase the financial performance of your business, to provide a more complete service offering to customers, to diversify the existing business model, or to bring in new skills and expertise. Having a clear set of objectives from the outset is the single most important step


in ensuring you make the right acquisitions as it provides focus.


Determine the financial criteria


Defining the funding required (such as from banks or private equity), the internal rate of return and the risk profile you are comfortable with, will help you define whether you are looking for acquisitions that will provide a steady yearly return, or a higher risk opportunity with the potential to provide much higher returns.


Is an acquisition the best solution?


Would you be better to pursue a commercial partnership with another firm and maintain your focus on core products?


Write a business plan


Agree a framework business plan that outlines how an acquisition will be managed and the routes to


market that can be leveraged from your existing business. This can then be used to assess potential targets during an acquisition search and subsequent negotiations.


Review the staff and culture of the target


In most acquisitions, the target will need to retain its operational staff so it’s important to look carefully at the management and staff culture of the target. Planning how the target will be integrated to your current business from the outset will ensure that any disruption is minimised and synergies are realised quickly.


Meridian has acted for a number of buy-side mandates, assisting companies to structure and integrate acquisitions often by formulating a 90-day plan. Its combination of industry, venture capital and non-executive


experience allows it to view acquisitions from a variety of perspectives and advise on the wide range of strategic and operational decisions involved.


Details: Philip Mettam 0844-225-8800 www.meridiancf.com


Reverse earnouts: a growing trend


Reverse, or negative, earnouts are increasingly common in M&A transactions. They are often particularly attractive from a sellers’ tax structuring perspective, writes Oliver Kelly of Lamport Bassitt


A traditional earnout is structured so that part of the purchase price is calculated by reference to the future performance of the business or company being acquired. The earnout is only paid to the sellers if the target company achieves certain performance targets, usually of a financial nature, in the prescribed period. If performance targets are missed, then the amount payable to the sellers is reduced according to a formula contained in the SPA.


As the name suggests, a reverse earnout works the opposite way around. The sellers either receive the full amount of the purchase price at completion or the full amount is ascertainable at completion even if part of the earnout consideration is deferred. In either event, the amount due is final and ascertainable and from a tax perspective that is the key issue.


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The effect, and generally the rationale, is that the sellers are likely to benefit from entrepreneurs’ relief (at a rate of 10%, subject to meeting the requisite criteria) on all of the consideration payable


In reverse earnout transactions, the SPA will contain a profit warranty, or similar earnout equivalent, with a provision for liquidated damages in the event that the warranty is not met. This means that either the sellers repay the liquidated damages or, in practice what almost certainly happens is, a sum is set off against the fixed amount of the deferred consideration.


earnout, because the earnout consideration is contingent and unascertainable, the probability is that the usual rates of capital gains tax (at a rate of 28% for higher rate earners) will apply.


The buyer will accrue additional stamp duty (at a rate of 0.5% of the total consideration) under a reverse earnout structure. However, this may be reflected in price negations if this structure is to be adopted.


The same issues may arise for the sellers in terms of protecting the earnout from manipulation whichever method is used.


Details: Oliver Kelly 023-8083-1909 oliver.kelly@lamportbassitt.co.uk


The effect, and generally the rationale, is that the sellers are likely to benefit from entrepreneurs’ relief (at a rate of 10%, subject to meeting the requisite criteria) on all of the consideration payable. In contrast, under a traditional


THE BUSINESS MAGAZINE – SOLENT & SOUTH CENTRAL – DECEMBER 13/JANUARY 14


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