article
Buy now, pay later - the new M&A mantra
10 June 2009
The tough economic situation has had a profound effect on all
areas of business in the Midlands, forcing many companies to adopt
more innovative approaches to corporate acquisitions. Joanne Bligh,
corporate finance partner at Birmingham law firm Browne Jacobson
has observed a recent wave of transactions taking place on the back
of deferred consideration only, which on the face of it, seems like
a practical solution but it’s not without its risks.
“Just as consumers have curbed their spending, so too has the
corporate world. Poor liquidity, lack of bank debt and confidence
in the global banking market is taking its toll on the merger and
acquisition (M&A) market which saw a significant downturn in
the number and value of deals in the second half of 2008. This dip
in activity has acted as a catalyst for a noticeable shift in the
industry where both sellers and buyers are looking to alternative
ways to facilitate transactions.
“While many PLCs and larger businesses are riding out the
recession by conserving what they have, others are choosing instead
to unload their ‘lame duck’ businesses that are not core to their
offering. Then there are other enterprises looking to extend what
they have, but which may be struggling to find the funding to
acquire by way of the more traditional methods. Timing is also a
factor for the parties as funding is taking longer to secure. Both
parties are seeking a new solution such as buying using deferred
consideration only with no payments on completion which can provide
an answer for both parties.
“This latter, pragmatic solution allows a buyer to acquire a
business, paying nothing upfront, instead agreeing to pay further
down the track, when they have raised the necessary funding,
perhaps on the back of the assets themselves, or upon the business
starting to generate sufficient cash to repay the seller. This
could mean that the seller will not see all of the consideration
for several months down the track. For the buyer, this means there
is little risk involved as it allows them to buy now and pay later,
either when the business is in a more stable position and the
financial market sees a return of confidence, or when they have
gone through the process of raising finance on the assets they have
just bought.
“Equally, the attraction for PLCs and large companies is that
they can shift non-core divisions – potentially without having to
adjust the cost to reflect the current market – and concentrate on
their core competencies. Without entering into the transaction, the
seller could be faced with running the business at a loss, simply
reducing the time it is spending in the divesting business or,
looking at a worst case scenario, it reduces the threat of
insolvency arrangements, and avoids the costs and administration
burden involved in closing down a business, in turn saving jobs.
Deferred consideration can also make a potential acquisition more
attractive. Sellers who insist on an all out cash deal,
particularly in these challenging times, could be effectively
reducing the number of potential suitors as well as leading to
concerns about the long term stability of the business and a
perceived lack of confidence in the future of the business on the
part of the seller.
“Sellers should try to keep any repayment period as short as
possible but long enough not to put undue pressure on the buyer.
Charging interest can also incentivise the buyer to make any
repayments as quickly as possible. The flip side is that, should
the buyer fail to pay the future staged instalments for whatever
reason, the seller may be left with no return for the assets they
have sold, resulting potentially in either costly and time
consuming litigation proceedings to recover the monies they are
owed, providing the buyer is solvent. A seller could also be
looking at the onerous task of enforcing any security it has taken
in relation to the deferred consideration if they feel that the
buyer is less financially stable, making time of the essence to
recover their cash, not to mention a great deal of hassle and an
unwanted diversion.
“Sellers therefore must carry out full and proper due diligence
prior to the deal on the identity of the buyer, its status, its
assets and trading history and then ensure that it takes sufficient
security to cover the outstanding deferred consideration. This can
take the form of charges over the assets it is selling, for
example, a floating charge over stock and debts or a fixed charge
over assets such as equipment and property. Other security options
include parent company or personal guarantees, title to specific
assets remaining in the sellers name until the purchase price is
paid in full or obliging the buyer to place a specified sum in a
joint deposit account on completion making clear in what
circumstances this can be released.
“Whilst deferred consideration agreements can appear complex,
they have many positives. If both parties approach the deal
sensibly and commercially, the use of deferred consideration to
facilitate a deal which would not otherwise happen, allows sellers
to divest non core assets, and entrepreneurs to root out businesses
which are commercially viable.
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