By Jessica Nugent,
Merging or acquiring another agency can be a daunting prospect, but with the right approach difficulties can be minimised. With careful planning at an early stage and good professional advisers it is possible to limit commercial risks and the impact on your own valuable time. Here are my top-line considerations if you are planning your next move:
1: The deal
It is likely that you will already have found a target. If not, your professional advisers and/or a corporate finance adviser are good places to start. Growth by acquisition can be very successful, but it is important to find a target that is a good fit with your own business or integration will be difficult. Check whether there are any business reasons why a target might not be appropriate even if it looks attractive, e.g. does it have a big client that competes with one of yours?
The next step is agreeing the Heads of Terms, which will set out the principal terms of the deal. The Heads are not usually legally binding and in most cases either party can walk away at any time before the final agreement is signed.
Ask the sellers for an exclusivity period to prevent them from entering into negotiations with anyone else for a certain time. This will provide comfort when you start incurring professional fees on the deal.
3: Transaction Structure
Each deal is unique but you should consider:
– The structure of the target. Is it a sole trader, partnership or company? Each comes with its own challenges and considerations.
– If the target is a company you would normally buy the shares in the company. A company is a separate legal entity that has its own assets and liabilities; in buying the company, you take on all of those.
– Alternatively, you could purchase the business and assets of the agency. This would allow you to cherry pick which assets and liabilities of the agency you acquire, but it can be less attractive from a tax perspective.
3: Due Diligence
A thorough due diligence exercise is crucial. You will want to know exactly what assets, goodwill, IP rights, employees, properties, contracts, debts and liabilities you are acquiring. Legal due diligence is carried out by solicitors and financial and tax due diligence by your accountants. At this point it is common for the buyer to be asked to enter into a Confidentiality (or Non-Disclosure) Agreement.
4: The Purchase Agreement
The Purchase Agreement sets out the full terms of the deal. It will include the purchase price, completion logistics, and any indemnities, warranties and non-compete or other buyer protections that are agreed. It is also key to allocating risk (primarily in relation to the agency’s obligations and liabilities) between the buyer and the seller. The agreement will be the subject of much negotiation and may take some time to conclude.
Exchange and completion can take place simultaneously or by exchange of contracts followed by completion some days/weeks/months later. The latter is more complicated and only worthwhile if there are matters to be dealt with after the parties have certainty that the deal will go ahead, but before completion.
5: The Target Team
Agencies are people businesses; their value will lie in the relationships held by key individuals (usually the sellers) with their clients. Therefore, it is unusual for a buyer to want a clean-break on completion whereby the sellers walk away from the agency. If you want the sellers to stick around, either long term or for a shorter period to help with transition and integration of the agency into your business, consider offering an earn-out. This is where some of the consideration is paid on completion and some is deferred to a later date and calculated by reference to the profits of the business in the period after completion. It offers a big incentive to sellers to ensure the continued success of the business.
Are there any key employees who are not sellers who should be looked after during the transaction? It can be an unsettling time for staff and they may be tempted to resign if they are not sure what the future holds.
6: Seek advice early and plan
Thorough and comprehensive planning will have a significant impact on the outcome of your deal. Seek professional advice early on, as a good legal, accounting and tax team will have been through similar transactions before and they should spot potential difficulties at an early stage and help minimise your risk.
Jessica Nugent is a partner in the corporate team at Goodman Derrick LLP.