Challenges With Asset Purchase Type Acquisitions

Challenges with asset purchase type acquisitions

by a searcher from HEC School of Management, Paris

2 years ago

Hello,
I am nearing a deal to acquire my target via asset purchase and I believe there are some challenges in doing it this way

1) Supplier credit. As you are forming a NewCo, suppliers might not extend the same payment terms to the new business as they did to the seller OldCo. If you have to pay earlier to your vendors, it will impact cashflow and WC
2) Customer contracts. Many customers will have contracts with OldCo. These contacts will require permission from the client before they are re-assigned to the NewCo. Reassigning contracts might trigger the customer to re-negotiate terms
3) It is a constantly moving target, where both parties do not know the final price until close to the completion day. This is because the debtor book and inventory will fluctuate day to day. If there is a sudden increase in A/R, there is a risk of underfunding the deal.

Did anyone experience similar challenges in your acquisition journey? Would you consider the above real issues, or non -issues? If the former, what creative solutions did you come up with to address them (& any others you can think of?)

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23 comments

searcher from Emory University

Hi Chin...these are very real risks in any deal- especially when there are supplier contract clauses that could be triggered based on the sale. But the fact you have these on your radar is half the battle.Now it's best to decide how to manage them.High engagement with ALL key stakeholders after LOI is critical to understanding what you're truly getting into.Bridge as many relationships as possible prior to close. Work to reassure service/product quality but also to gain assurances, preferably formal, that there will be no (major) contractual changes.If there will be, ask your seller to leverage their relationship to optimize them. This is a common mitigation strategy.Also, it's common to not know inventory levels exactly leading up to closing.But historical figures will give you a range and an average.Same with A/R.So knowing supplier contracts are materially changing and knowing the levels of key financial metrics are materially different will allow you to raise any concerns with the seller prior to closing. Only then (ceteris paribus) should you concern yourself with possibly renegotiating the deal.At that point, you have valid cause.Good luck.

2 years ago | like reply | 0 likes

searcher from The University of Texas at Austin - Red McCombs School of Business

Hi Searchfunder member‌, just wondering how you have progressed with this asset purchase acquisition?
I was curious as to whether a classic earn-out would mitigate the supplier credit, customer contracts, and NWC risks?
Such that should key suppliers/customers not be fully transitioned to the NewCo, then that would be reflected in the seller's earn-out.
Or am I actually missing some key points here?
Looking forward to your insights.

Challenges with asset purchase type acquisitions

by a searcher from HEC School of Management, Paris

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