Corporate Finance – Review of Transactions 2018 – Some Practical Problems

Corporate Finance – Review of Transactions 2018 – Some Practical Problems

In my previous article, I mentioned surplus assets and net debt and the difficulty of determining what normal levels of these and working capital are and how they should be calculated.  Set out below are a few examples of problem areas we have encountered:

  • Buyer considered part of the cash balances “trapped” and so was reluctant to accept it as payable to vendor. This occurred in relation to a type of cash in transit – eventually the issue was satisfactorily resolved to the vendor’s benefit.
  • Company had overdue creditors and wanted to treat these as part of the debt calculation – this was partially resolved but an adjustment was required based on the oldest balances.
  • Buyer wanted to treat all debts to HMRC as part of debt including the PAYE/NI and VAT current balances – resolved entirely to the vendors’ satisfaction.
  • Buyer wanted to adjust cash balance downwards to reflect old debtor balances – resolved by all being payable to the vendors if these balances were collected within a specified time frame.
  • Due to matters entirely outside the vendors control, target business suddenly obtained around 30% more business and all the surplus cash balances were used to fund this growth and working capital level increased both to “new normals”. Partially resolved but main resolution was in terms of increased earn out potential arising from the new business.
  • Vendor manager became so distracted from the day to day running of the business due to the demands of the company sale process that matters such as billing and control over cash management were neglected, leading to significantly lower cash balances and higher working capital levels than expected. To some extent resolved by delaying completion for a short period to allow this effect to be redressed.
  • The company’s net debt position was adversely effected by major quarterly outflow due to VAT payments – but which only affected matters for a few days each quarter. As the historic review of this matter confirmed this was the case then the buyer accepted that normal levels of net debt should exclude the temporary VAT effect.
  • Trading month to month was very volatile and had low months been used a significant reduction in Equity value would have occurred. This picture was confirmed by historic data and it was agreed an average level of net debt be used as a normal level.
  • Trading was massively seasonal which lead to very significant levels of debt prior to generation of large surplus cash. This was established as a temporary issue and so an average across the year was used as the normal level.
  • Due to increasing levels of profitability more cash was continuously generated so to use as average reduced the potential Equity value. Completion balances were agreed instead to calculate the adjustment (payment however partly deferred until confirmed by post completion results).

On that note and as a final thought selling a business is a very stressful time for the individuals charged with running the sale process, often their mains skills are not in finance and so best advice to them is not to be influenced by the buyer to agree amendments to terms previously agreed “on-the-hoof” – always take the time and revert to your professional advisers and take their counsel.

David Enser is a Corporate Finance Director of Rickard Luckin Limited
Email: david.enser@rickardluckin.co.uk
Tel: 01245 254209
Mob: 07717 366724

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