Caveat emptor


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Given that the majority of SMEs are family businesses, navigating a few quirks is par for the course for any purchaser.

However, the lack of formal contracts, poor administration and unconventional wage- arrangements occasionally arising when business has grown from the kitchen table can be off putting, says Adrian Jones.

"We had a situation a few years back where we were acting for a multinational looking to buy a UK business which had been a sub-contractor of the acquirer for years," he says.

"But the target company was in a complete mess. There were irregularities in the accounts, people were paid in cash, company cars were registered to individuals, purchase receipts were just stuffed in carrier bags in the office. The buyer pulled out, not surprisingly you might think, but it also left them questioning the underlying commercial relationship – were they confident having these guys working for them as a sub-contractor?"

But it's not just poor administration that puts a purchaser off. Sometimes there might be a 'poison pill' for a potential acquirer, as Jones explains. "There might be a change of control clause in a major supply contract, for instance, so it's important sellers consider such issues before engaging in a sale process."

One other instance Jones recalls involved the purchase of a company which relied on a number of substantial fixed term contracts. "The business was sold at a time when a number its key fixed term contracts were coming up for renewal. The director sellers were on a six-month earn-out which expired before contracts were renewed. Of course, they all left after six months, and all the contracts expired and were not renewed."

"Quite often it's the assets of the business themselves which cause problems," adds Tony Poole. "We've seen situations where a family business has managed to acquire all kinds of things down the track, yachts, a ski- chalet, and then when they came to sell, it turned out assets were owned or part-owned by individual shareholders. Sorting all that out can be a real mess, and can hold up or even end a deal entirely."

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