Product Costs
There is much more to be negotiated than simply agreeing a purchase price. The deferral of part of the purchase consideration, the structure of the deal, tax implications, conditions, warranties and indemnities may affect the total cost and attractiveness of the deal significantly.
The first matter for negotiation is an exclusive option period, where the company is not listed on a stock exchange. This means that an auction situation will be avoided. If there is a competitive bid, the purchase price required is likely to be higher. In addition, the added uncertainty may well damage morale within the company.
Key matters to be resolved in addition to the purchase price include:
• the use and cost of central services which will be needed for an interim period until alternative facilities are created within the company, e.g. data-processing
• rights to intellectual property such as patents, trademarks, trade names and licences
• the cost of any redundancies
• the transfer of pension-scheme benefits
• the structure of the deal and the tax implications for both parties
• warranties and indemnities
In most cases tough and expert negotiation is needed to achieve a satisfactory price for a buy-out or a buy-in. The burden of debt interest means there is usually a fine dividing line between an acceptable purchase price and one which prohibits a deal altogether.
When agreement has been reached, the investors and lenders will normally require an accountants' report to be prepared by a suitable firm. It is the accountants' report rather than the business plan on which the investors will formally commit themselves.
In the case of a buy-out the management team's knowledge of the business used to prepare the business plan should mean that there are no significant adverse disclosures in the accountants' report. In a management buy-in, however, the business plan has to be written much more on an arm's length basis; so there is a greater likelihood that the deal is renegotiated or the financial structure amended as a result of the accountants' re
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