BUYER BEWARE

We often write about M&A from the prospective of the selling company. But the opposing side to those conundrums are the issues facing even the most astute buyers. The risks of making a bad purchase are often magnified, especially in this highly competitive environment with much fewer quality deals. Since 25% of our investment banking services are advisory to buyers, we are acutely tuned to the adage “Buyer Beware.”

Some of the most critical dilemmas for buyers are the following:

1. Does the “Buffet Rule” apply? Do I really like, respect and trust the seller’s key management and owners? If not, forget the deal terms. Just pass!

2. Does the company CFO or lead financial person clearly and concisely present the financial statements, working capital (including inventory), and seasonality or customer fluctuations during a fiscal year?

3. How well do I really understand the business? Whom do I retain from the seller and what personnel resources can I bring to shore up the deficiencies?

4. What due diligence do I conduct or hire out, such as Q of E (Quality of Earnings)? Can this team of experts uncover the “hidden flaws” of the seller?

5. Am I certain what intellectual property is owned, free and clear of potential infringement and litigation? Should I get a legal opinion to cover this potential exigency, in addition to insurance coverage on the IP?

6. How much should I propose to pay in cash, stock or an earnout?

7. What are the tax ramifications of various purchase structures, and which is best for me?

8. If my most reasonable price is overbid, how much more am I willing to pay to chase this particular deal?

9. Will there be issues getting necessary licenses and/or governmental approvals for current and future customer contracts?

10. Will this transaction be accretive and really replace organic internal growth and profitability?