By Winslows Tax and Park Place Corporate Finance
Foreword by Andrew Waddell, Managing Director, Winslows Tax Law.
Over the years at Winslows, we have had the privilege of working alongside many excellent corporate law firms and corporate teams and we have seen an evolution in terms of how tax workstreams are treated by our corporate colleagues. No longer is tax considered to be outside of a corporate lawyer’s deal considerations, or something that is for the clients to source advice on themselves. Corporate teams by and large understand well the importance of tax to the wider deal and do a good job of involving specialists to manage that risk.
However, corporate finance specialists do on occasion seem to still be overlooked and it is often only when us tax advisers are raising questions and seeking instructions that it becomes clear there is a missing specialist within the client’s deal team. Often at the small-mid market size of transactions, we are seeing clients’ generalist accountants or even the target’s in-house accounts team being asked to deal with highly specialised M&A corporate finance issues, which can often be to the detriment of the client’s value position.
In the same way that corporate lawyers regularly identify the need to introduce tax law specialists to a deal, the best operators are also on the lookout for gaps in clients’ CF advice at the outset of a transaction.
For a summary of the key issues to be aware of, the WIZE has caught up with Richard Firth of Park Place Corporate Finance who shared his top 3 reasons to involve specialist CF teams.
1. Maximising Sale Value
I have encountered numerous situations where the commercial terms of a transaction appear agreed, yet nuances in the equity value calculation or earnout calculation provide significant opportunities for value creation and/or loss. The concepts of normalised working capital and adjustments for cash- and debt-like items are only part science, with art playing a significant role.
Whenever a balance sheet contains millions of pounds, there will always be scope for healthy (and reasoned) debate over the interpretation of how certain items should be apportioned between buyer and seller.
The reason for transacting with a price adjustment, by reference to the normalised net working capital position, is to remove a winner and loser dynamic from the timing of the deal and prevent sellers from manipulating balance sheet positions ahead of a sale. However, there is no uniform approach to calculating ‘normal’ with decisions – for example – to be made on the reference period i.e. is it based on history entirely or do forecasts play a part? Furthermore, it is rare that simply selecting a period and decreeing it ‘normal’ is sufficient as there will typically be a series of unusual items that warrant investigation, e.g. early/late payments from debtors and to creditors.
The purpose of transacting cash and debt free is to provide an unencumbered balance sheet to the buyer which disregards how the sellers chose to fund the business. Corporation Tax up to the point of completion is rarely disputed but deferred tax is much more debatable. Buyers will argue it is simply tax that has been deferred, but one might counter by asking how likely it is to ever crystalise as a cash outflow in the future for the buyer. If a business has over (or under) spent on capex in recent history this will skew the free cash position, which again provides scope for negotiation on how that should be reflected in reaching equity value. There are many more items, such as; deferred revenue, accruals for bonuses, lease dilapidations provisions etc. that are commonly debated and can often lead to a significant swing in purchase price.
As we have moved from a period of record high valuations towards more historic norms, the use of earn-outs and deferred consideration has increased. This leads to additional complexity and creates more opportunity for value to be won (or risk that value will be lost), further supporting the argument that such negotiations are best handled by a corporate financier and lawyer team.
It can be unfortunate timing for corporate lawyers if price battles happen when the most plates are spinning and tensions are high in the later stages of a transaction, but there is often significant value to be had. In one recent transaction where we were introduced after the buyer’s position on the equity value calculation had been tabled, we were able to discredit certain positions and negotiate a >10% improvement in shareholder value. Needless to say this resulted in a very satisfied client.
2. Risk mitigation (for client and corporate lawyers)
A key area of more direct benefit to corporate lawyers in working alongside corporate finance advisers is the increased efficiency and deliverability of the process. Both of which serve to satisfy clients and improve time recovery.
Transactions often take on a life of their own, increasing the advisory time required and driving up client costs. This can place significant pressure on legal teams, whose workload easily swells when transactions become protracted.
By introducing a corporate finance adviser into the process, lawyers can benefit from an expert partner who adopts, and takes responsibility for, certain parts of the workload. This allows both parties to focus on their respective strengths and areas of responsibility, ultimately delivering a better outcome for the client and advisers alike.
3. Stress relief and increased deal deliverability
Corporate transactions are not like fine wines; they do not age well. It takes a team effort to ensure a client’s needs and levels of understanding are managed throughout a process and the value of this collaborative approach is well summed up by a recent quote: “Your involvement immediately lowered my blood pressure.” This speaks volumes about the reassurance that an experienced corporate finance adviser can bring to an M&A transaction.
By working together, corporate lawyers and corporate finance advisers can enhance their clients’ experience, streamline complex transactions, and create tangible financial benefits. The introduction of a trusted corporate finance professional into the process is not just a value-add—it can be a game-changer for both the client and the incumbent advisory team.
Richard Firth: RichardFirth@ppcf.co.uk
Andrew Waddell: andrew@winslows.co.uk