Company Acquisition - Consulting

Reasons for acquiring a company can be, for example, an alternative to a start-up, diversification (horizontal, vertical, conglomerate) of an existing company or inorganic growth by skilful takeover of competitors. While these conflict situations are not-dominated (optional) other conflict situations are dominated (forced). This can be for example the case if one is forced to pay compensation by law.

Before acquiring a company, it’s wise to question the purpose (objectives) of the transaction and whether this can also be reached in different ways. While in the M&A transaction, one should always bear the price of reconstructing the company in mind. If a company is acquired by another one, it’s relevant to check if it fits the overall strategy and how it can be integrated. Here I am available for advice if needed.

For every business valuation, a profound analysis of the business and its environment must be conducted (Due Diligence). The intended strategy for the future should also be taken into account. Therefore, the business and its environment is simulated on a lot of possible paths.

Importantly, the buyer, contrary to the seller, is structurally in a disadvantageous position. Latter has gained experience over the years and might withhold important information. More than this, the company might have been optimised in recent years. For this, he might have taken measurements which are profitable in the short term but are negatively affecting the company in the long run.

Based on the simulation of the business and its environment, a business valuation can be conducted.

The decision value, in the case of a company sale the maximum acceptable purchase price, will be calculated by the approach of functional business valuation, while argumentation values might be calculated by more or less theoretical sound methods. Such include the DCF-method, the capitalised earning method, multiples and some others as well. An arbitration value, in the case of a company acquisition, is only calculated if a neutral assessment is needed or required.

The conflict situation can be multi-dimensional. Next to the price of the company, it might also be questioned whether employees or real estate will be taken over. The price itself can be a one-time payment but also an instalment or even a temporal or life annuity. The last two are especially important in the case of company succession. Given the fact that those payments comprise long periods of time, they do influence the value of the company.

The valuation model contains the preferences for withdrawal, other cash flows and taxes. More than this, it should be mentioned that the focus of the simulation and valuation is on providing you with an excellent information base for your negotiations.

The price can be paid in multiple ways:

• equity financing
• debt financing
• equity or debt financing and stretching payments over a period of time

Financing by equity or debt needn’t be explained. In praxis, the last point will be of major importance. The seller might sell his life’s work and is interested in getting a price in the form of an annuity by his successor. This might be a temporal annuity or a life annuity (based on the lifetime, shortened, prolonged) and can contain various other aspects like payments to the spouse in the case of death. Because the duration of the payment of the life annuity depends on the lifetime, it might be advantageous to involve an insurance agency.

An instalment (fixed period, for example five years) can be an excellent solution for a successor who is highly qualified but lacks equity and does not meet credit conditions. Other possibilities and combinations will not be mentioned in more detail. Often, their classification does also depend on national tax law.

I will be glad to advise you on the subject of pricing and financing.

On the subject of law and taxation, some remarks should be done. During my studies, I gained a deep understanding of the subject of tax planning (German tax law) and I maintain this knowledge. This enables me adequately assessing the consequences of a company acquisition and modelling it. However, I’m not a tax advisor and I don’t give tax advise.

For an M&A transaction, it’s wise to include the future tax advisor and a lawyer. In an M&A transaction, every expert has their key strength, like in a hospital where every doctor has their medical discipline. Especially in transnational transactions, it can become complex.

My key focus is on the business valuation and your support during the M&A transaction. However, it should be mentioned that in general, you can differentiate between a shared deal and an asset deal. In a shared deal the business is transferred together with its legal entity, while in an asset deal assets and liabilities are transferred into a new legal entity and the old one is liquidised.

Next, the negotiations take place. Often the seller is emotionally attached to his company and might considerably over- or underestimate its value. For this reason, it’s important to analyse the needs of the seller and adapt the valuation model to it. This is especially true for natural persons. So a guarantee for a takeover of his employees, whom he knows for years, can be vital. Another important factor is considering his financial situation in retirement.

Use the various scenarios and the company values calculated by different approaches for argumentation in your negotiations. It’s vital to never make quick concessions. Rather, let the valuation model be updated. Always keep in mind not going lower than the decision value and keep the price of reconstruction of the company in mind. It can also be that there will be no agreement on the pricing.

After successful negotiations with the seller, the results need to be checked by a lawyer and tax advisor, who can then proceed with the legal process. My focus is on calculating the decision value and your support. Also, these experts have their place in M&A transactions, especially in an international context.