There can be many reasons for acquiring a company. In any case, acquiring a company is always a bold move—and should always be a means to a clearly defined end. Otherwise, it will be costly. However, there are ways to minimize business risk and avoid costly mistakes. With these five expert tips, buyers can get more out of the deal.
1. TAKE A CLOSER LOOK AT THE BUSINESS VALUATION
Business valuations are always subjective. “There is no objective value when it comes to the company’s future and risk assessment. The situation is different with the price, which is the result of market negotiations, ” says Professor Birgit Felden of TMS Management Consulting. With every business sale, there is a risk that the financial statements have been embellished. Felden therefore advises conducting a detailed assessment of the risks associated with an investment as part of a comprehensive due diligence process: “The goal is to make a valid assessment of what the buyer is taking on.”
2. GREATER RISK WHEN PURCHASING OWNER-MANAGED COMPANIES
When purchasing larger companies with the appropriate structure, there is rarely any interference in day-to-day operations and thus in the company’s potential profitability. The situation is different when acquiring small and medium-sized enterprises (SMEs). Peter Klippel, managing partner at con|cess, explains why: “These companies almost always have owner-managed structures, and the management team is replaced or changed as part of the sale.
This impact on day-to-day operations carries a higher risk and consequently has a negative effect on the company’s valuation.”
TIP 3: GREATER PROFITABILITY THROUGH DEBT FINANCING
When purchasing a company, the question arises: How much equity can or must the investor contribute? Especially in times of negative interest rates, family-owned businesses in particular tend to prefer a higher equity share when attracting investment. Sven-Roger von Schilling, a partner at Kloepfel Corporate Finance, warns, however: “Equity is always more expensive than debt.”
He advises including a significant portion of debt financing in the purchase price financing. This increases profitability. A general guideline for typical small and medium-sized enterprises: “Banks generally expect a minimum equity share of 20 to 25 percent,” explains Sebastian Göring, Managing Partner at EUROCONSIL, noting that banks’ requirements vary depending on the investor’s credit risk and the underlying purchase price.
TIP 4: THE ADVISOR IS MORE IMPORTANT THAN THE FINANCIAL INSTITUTION
Financing a business acquisition always involves discussions with financial institutions. For Michael Loch, managing partner of Ulrich Glawe Unternehmensvermittlung, however, the advisor’s expertise is the decisive factor: “Once you’ve found an advisor who understands the industry, you can put together financing fairly quickly and effectively.”
5. TIP: CREDITWORTHINESS AFFECTS THE INTEREST RATE
When granting loans, a certain portion must be covered by equity capital in accordance with the guidelines of the Basel Committee. For this reason, financial institutions use risk-adjusted interest rates for financing packages, which can, however, fluctuate significantly. “A great deal depends on the buyer’s creditworthiness, ” explains Göring. In other words, financially strong investors are very likely to receive better financing terms than small business owners.
