Several factors come into play that could steer a hopeful business owner into overpaying for an acquisition.
According to experts in accounting, banking and law, the pitfalls generally include a lack of due diligence, failure to complete a buyer’s valuation or even forming an emotional attachment to a potentially detrimental deal. Buyers should surround themselves with a team of experts to allow them to gather as much information about a target company and to uncover any red flags.
“It’s not just the financials,” said Andrea Lee Brady, a CPA and shareholder with Concannon Miller in Bethlehem. “It’s how the business is run and what sets the tone at the top of the company.”
Brady has seen clients start their acquisition process with a broker or banker before performing due diligence. The result could be unintended consequences or issues resulting in buyer’s remorse.
Ken Charette, a shareholder and attorney with Fitzpatrick Lentz & Bubba, P.C., a law firm in Center Valley, said buyers should carefully study the facts and circumstances surrounding a potential purchase so they have a good understanding of any potential liabilities prior to closing on the company. Such liabilities could include lawsuits, customer disputes, employment matters or regulatory actions.
“By learning about these items pre-closing and by requiring a seller to make detailed representations and warranties regarding their business in the transaction documents, a buyer, in consultation with their professional advisers, can help minimize their exposure by including certain safeguards in the transaction documents,” Charette said.
Along with due diligence buyers want to have a valuation report done, which results in a detailed value. Denise Hozza, a CPA and director with Concannon Miller, explained that a valuation report provides an overview of a company’s operations, history, management and industry, among other things. Most are summary reports, she said, as a full report is costly and usually done for IRS purposes.
Robert J McCormack, managing partner at Murphy McCormack Capital Advisors in Lewisburg, said failure to complete due diligence as well as a valuation report are key reasons why many will pay too much for a company. He added that continuing to do due diligence after an offer has been made will also help in uncovering red flags.
Sometimes those eager to buy will form an emotional attachment to the target company or the idea of the deal, leading them to ignore the red flags that have been revealed, McCormack said. Such attachments could include being successful in a type of business in one part of the state and wanting to bring the business back home or seeking a lifestyle brought on by a certain venture. McCormack added that these attachments can often blind the due diligence process.
Alongside financial red flags such as falling sales or profits, employee turnover and deferred maintenance are areas to consider in due diligence but are often neglected. McCormack said many ignore subtle signs such as poorly maintained equipment because they think they can fix it later. Others may buy a company without meeting its staff.
“Purchase price is one thing, but even if you pay the lower price if it’s not performing or you’re not in the right business you’re still overpaying,” McCormack said.