M&A Imagineer: Dramatic Operating Cost Hikes
Sometimes it seems that dealing with uncertainty has become the new norm?? Business costs of one sort or another can fluctuate widely, especially energy, which is bad enough when operating a business but could jeopardise a future exit – making it very hard for an acquirer to accurately forecast the costs, as historical data becomes relatively meaningless, leaving a question mark as to what is a “fair” price or was a “fair” price actually paid?
Whilst, in reality, there may be no “perfect” deals, an entrepreneurial mind-set could incentivise the business buyer to strategize ways to mitigate any future acquisition risk and the adverse impact that it may have upon the original terms agreed?? Retrospective adjustments may need to be made to such an agreement if it is to be salvaged during dramatic price and cost shocks – that vary substantially from the historical average trend line, over the preceding few decades?? Alternatively, if stipulated within the contract terms, hand back the keys and walkaway (cutting your losses), or make the decision to simply close down the business (in a structured way with expert help)??
Here are a few ideas that may serve to induce creative thinking – assuming that you wish to continue to honour any informal or formal acquisition agreement with the seller (in random order)?
1.????? Extend the repayment schedule by several more years; with future payments based upon the prevailing free cash flow after the price hikes (only a fraction of the adjusted and available income stream is to be used to meet repayments; the rest is to be reinvested into the business and employed to supplement the contingency reserve)?
2.????? Excluding relatively minor price increases, any sudden and huge cost rises are to be grouped (for the duration of such hikes) and set-off against the total original purchase price and/or any outstanding sum due to the seller?
3.????? Where much of the purchase price has already been settled, any sum held in escrow (for the duration of the agreement term) is to be rebated back to the business acquirer pro rata in respect of the collated price hike?
4.????? Exercise any previously negotiated surety, guarantees and warranties; obligating a third party to pay in the event of an inevitable default due to a deteriorating financial/trading situation that will lead to eventual business closure?
5.????? Seek to recover any monies due from an insurance policy that specifically covers this eventuality (either as a single insured risk or as part of another business insurance plan)?
6.????? Agree a deferment for part of the agreed consideration equivalent to the collated price hike – until, that is, trading and financial conditions improve (if at all)?
7.????? Where legal title to some of the business assets are still held by the seller by way of a lien, charge, debenture etc. – these restrictions are to be removed; enabling the buyer to re-structure the business’s finances with the existing or more competitive lenders that may provide further cash injection into the business to cover the additional operating costs?
8.????? If all the financial consideration was handed over to the seller for the purchase price, examine your legal documents for “clawback” clauses, or, if not too late, require the seller’s lawyer to agree to include these within any impending document (if still in the negotiating phase) – requiring the seller to pay back any monies equivalent to the “collated price hikes” for the period of their duration?
A seasoned entrepreneur, business coach, mentor or similar consultant may have other constructive suggestions for dealing with such dramatic increases in overheads – so it may be wise to spread your advisory net as wide as possible for additional help?
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Kip
The EBO Guy????????
…Acquiring businesses for employees