Kush Birdi – Financial and legal due diligence, what can go wrong!

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Julie Wilkinson  00:03

Hi, I’m Judy Wilkinson, and I’m a chartered management accountant. And I’m excited to be launching the build and exit podcast. This podcast is for business owners and entrepreneurs who are looking to expand their business portfolio by acquisition, or at some point in the future, when to exit their business. We’re going to bring real life stories and experiences of people who have grown by acquisition, who have exited their businesses, and other areas of business such as funding and cash flows. So there’ll be lots of opportunity to learn different areas of business and how you can in the end, transition your business from a lifestyle to an acid to look forward to seeing you soon. Hi, and welcome to the building exit Podcast. I’m Judy Wilkerson, and I’m the owner and founder of Wilkerson accounting solutions. I’m really excited to be here with cush birdie, who is the owner and founder of Birdie and CO solicitors. And we’re going to be talking all about m&a. Today, we’re going to look at different parts of the process, because we both specialise in mergers and acquisitions. And I have a lot of conversations with people, buyers and sellers about how to prepare for exit, but also some key things to think about when buying businesses. So because she’s a really experienced m&a advisor, working on sort of one to 10 million deals, his solicitor firms sort of does sweet spots around one to 3 million and probably worked on 50 to 100 deals over his time in m&a. So there’s gonna be lots of expertise in the room today. So Cush, first of all, I’d like to hand over to you. Tell us a bit about yourself and why you chose to come on the podcast. So


Kush Birdi  01:41

yeah, thanks, Judy, for the introduction there. So I think that, yeah, so as as Julie said, I’m the managing partner and co founder of bediako. Our core area is m&a. And the reason why we wanted to do this podcast today is just to really, really give practical insights and share our experience in terms of what we see on m&a deals. You know, whether it’s on the sell side or the buy side with the combined experience on the sort of the financial accounting side, and the legal side, we’re both obviously collectively well placed to share the trials and tribulations and the successes, of course, of the m&a deals we work on. So it would be really good to use our combined experiences in the way. So I hope that everybody can receive really, really valuable information and, and in order to help them use maximise their strategy, whether it’s acquiring or if you’re looking to sell down the line, then hopefully this podcast be really helpful for you today, touching upon sort of like the due diligence process, I suppose. My understanding is you support acquires in the due diligence process. Yeah,


Julie Wilkinson  02:50

so if we’ve worked with the seller to get ready to exit would do be on the sell side, due diligence, having the packet with the ready, obviously, if the buyer approaches, we act as the acquisition CFO for the buyer. So yeah, we’d help them on their due diligence. So we basically do financial, operational and tax, okay, other areas of due diligence that we look at. Now, that would be our full package. And the reason we suggest commercial financials done together is because there are a lot of cover, a lot of the commercial questions will eventually impact the cash flow. So when we go back to all this risk planning, scenario planning, and corporate governance that safeguard in the business, that all does come around the commercials, but in the end the commercials is what impacts the cash flow. Yeah.


Kush Birdi  03:35

Like things like debt recovery, recovering invoices, that kind of thing is, I guess, a big part of that the procedures? I mean, for that, what the process? Yeah, please, for that, that kind of stuff is irrelevant, I guess. Yeah.


Julie Wilkinson  03:48

And just things like, you know, people that try and do their own. You know, I’m not saying that businesses aren’t commercially savvy, it’s not about trying to say they can’t understand it. Obviously, they will have their own discussions and be doing it. But it’s how will things impact that later forecast. So for instance, you know, we do only do financial due diligence for people if that’s what they choose, and they’ve got a commercial team. But it doesn’t always sink as well as if you do the full due diligence, because for instance, if we do the financial only will do a top level forecast. But if you want to get into the trends, which we know seasonality is the accuracy of bookkeeping month on month profit margins, which does show which they show those shet trends show a lot about a business, you know, because if you see poor trends, you know, they’ve got poor bookkeeping. So that means fundamentally, there’s a bit of then can you actually trust the overall accounts? You know, because if it’s not if they haven’t got answers to things, yeah, and for instance, they’ll always say, so as we’re offset Oh, by account just for tax purposes, that’s fine. But why haven’t you got an adjustment then show it without that for tax purposes? Those sorts of things. They should have read it. This is what the seller should have ready? So useful, because why wouldn’t because it just means it a little bit and if your accountants doing it, why would an accountant knows you’re selling them I this is when you might want to bring third parties in, because why wouldn’t you already have the adjustments there already? I don’t think you should be going into due diligence about those types of reports. But, yeah, so, but things where it impacts would just be things like, Okay. Your top five biggest customers. Okay, so fair enough, you can look at the contracts, you can look at wins. But how quick do they pay? So we always see sellers got all the power in 30 days, but what do you get as they show? How quickly you pay in suppliers? What do you credit as a show? You know, things like, is the business trademarked? Yeah, because we have we are partners, where we help with trade, we help with trademarking in our full due diligence, we would help at least a basic trademark search. But if it’s not trademark, what’s the financial consequence of it? You know, that’s the that’s the question your article isn’t if in the commercial and due diligence process, you find things, in the end, the biggest risk is the financial consequence. So that always leads is always the accounts that end up with the impact. That’s why finance become a key part in the whole overall end to end planning of a business. Because it’s the budgets, the cash flow, and the finance, that are always impacted at the end if something goes wrong, you know, like, say, even by employees leaving, you know, fines, suing customers not paying and things like that, that all impacts the cash flow. So when we, when we do our commercial scenario plans, we would really be delving down into not only the baseline of the business, currently, there is a historic trend. Also, what does the bar went to add on to grow the business? Because that’s obviously a key part of why the buyer is buying it. But also looking at, you know, what are the potential risks and budgets they might need in the forecast? You know, the upfront fees? You know, do they need to replace a role? Have they got enough staff? You know, do you know, Are they behind? Are they understaffed? And then just budgets in general? You know, should they have a provision for recruitment fees, if they might need to, you know, what would happen if three employees left because it has happened? Because we always know engagement, engagement in employees is a risk post acquisition, because they might not like the new structure. So there’s, there’s a risk that it could happen. Quite a high risk, I think, and what does that do? So then I always think you need like, what’s the worst case scenario? What’s the best case scenario? And then a bit of scenario planning so that you can play around with the models to see? And that’s what we would call commercial? Yes, there’s asking questions, things like costing, but in the end, what do they do to the cash flow and the finances, that’s going to be the critical thing in the end? Because it’s going to be that like, that sustains the business? Longtime?


Kush Birdi  07:43

Yeah, really useful? I mean, with the staff as well. I mean, it’s always a sensitive issue as to what stage are they or some of them informed about the sale of the acquisition, that’s often a sensitive topic where, again, collaboration has to occur. And when that happens, because that can be, you know, then drives into that commercial risk of how what the reaction is going to be or not going to be. So already really important. I mean, on the legal side, I mean, due diligence is so this is just so important, on on a range of issues. I mean, I think there’s certain areas that whenever we’re doing an acquisition, we would look at certain things straight, straight away, we’ll just get straight on it, because they’re just so important things like intellectual property protection, property. So if there’s a leasehold or freehold property, then that’s going to be critical, because it’s going to be either directly or indirectly, a sizable chunk of the value of the deal. So we’d want to look at that really, really closely. Especially if the business relies on its property on its premises, which can be the case. But then even just other things like, you know, outstanding, so if there’s like, I don’t know, secured loans in the company, then we want to make sure those are going to be discharged at completion but not just that, we need to make sure we’ve got the right paperwork as well, the right releases from those lenders to make sure we’ve got written evidence that there’s no outstanding Amounts Owed those lenders post acquisition, because that’s really, really important as well, that there could be some kind of historic loan that’s covered by the wasn’t disclosed that the seller thought was paid off, or, or, or probably maybe was moved and 99 cent paid off, but it wasn’t and then actually, the lender security isn’t released after completion because oh, we’ve got this historic loan where there’s, you know, X amount of interest outstanding, we’re not releasing our security so that that that can happen if you haven’t got the right checks in place and you’re not making sure you’ve got the right confirmations through that throughout the due diligence process and paperwork, ultimately, so again, even with like the commercial stuff that you were talking about the legal aspects falls, you know, overlaps with that as well. And again financial because as you say all fees into financial impact on the business if those risks materialise, so things like change of control clauses in contracts, it could be that there’s, I don’t know, key assets, which are on the higher purchase agreements, or high value high purchase agreements, or financial leases, that kind of thing. And usually, you’d want to look for, if there’s a chain of control whether those financial products can be caught in, that is definitely a legal risk that we see a lot because someone that’s providing in asset finance, or any kind of lease arrangements are providing it to the current to the company, but with the trust of the current owners, right, and how they’ve operated the business. But if there’s a change of control, then that would then need to be reviewed. And usually, there’ll be a clause in there to allow those products to be withdrawn, which you obviously wouldn’t want if you’re acquiring a business. So those checks are really, really important to make. And there’s other things as well, you know, are you registered with for data protection, those kinds of things you see cropped up, as it was all renewed, and there can be financial risks associated with that and reputational risks as well. So, so yeah,


Julie Wilkinson  11:12

yeah, there’s, there’s a big risk. And I think our experience of post acquisition is operation to do usually drop, because what typically happens is the buyer doesn’t want to work in it, which is fine. And they might have all that sort of, you know, maybe the old owner staying on. But then what’s that relationship like now that that owner has been managed, you know, a lot of buyers will come in and want to have KPIs and the forecast and this business, these employees just aren’t used to doing that. And by sort of, obviously, you’ve got to try and put that in place. But you’ve got to try and put that in place whilst managing expectation that those employees to a point, because you can’t just come in and start dictating things that they haven’t done, you know, you might have employees that have worked there for, you know, 1020 years, and never been asked to do it. And it does, cause you know, and that’s where our experience as CFOs and financial experts is where we help because obviously, we’ve got experience with that some corporate, you know, we’re now corporate world, we used to work with all the different, we would work with the whole supply chain, that all the directors in the supply chain, to help them with their budgets, and help them manage it. And we’ve got that experience of, I suppose business partner in with different areas. And maybe, you know, if you haven’t got that experience, we have seen people doing quite dictatorial ways, and it does cause operational problems, we have seen people leave and, you know, bad relationship with employees. And ultimately, in the end, if the employees become disengaged, and the operations drop, just that alone will cause a cash flow issue, is getting them engaged and having, which is why meeting the employees as part of the due diligence process, and having conversations, I think is quite important as well. And making sure you bring on an HR expert for your deal as well. Make sure there’s no issues on the employee side. And you know, getting an all chart and find out who the people are, you know, the amount of times we see Oh, it’s a finance director, and he’s actually the owner’s wife or husband, you know, they’re not qualified finance director, they’ve just put them in that role, because they’ve done the bookkeeping for all the years. And obviously, I think as a buyer, they want to start getting the right people in place. And often buyers do buyers do typically invest, I think, especially post intuition on the right, type of thing. Yeah, the right roles. But the question is, do they know what the right role is? Like? Who the right role because that’s one thing we would look at intelligence is we’d look at the finance team and say, Where do we think the risks are? Because ultimately, if that buyer wants cash flows, and reporting relatively quickly after acquisition, if they can’t even produce a monthly amount, if they don’t have anybody to produce this monthly management accounts, it’s not just gonna happen after acquisition, because someone’s gonna have to make it happen. Yeah, absolutely. And that’s why and this is where additional budgets like this consultancy, post acquisition, they, they’ve the Excel has never invested fully in the finance team. You know, we see businesses of five, 6 million without a CFO, you know, you’d be looking at parts, you know, you’re probably not spending 50 grands worth on finance, that they should be spending just the same, they might not have a HR advisor, they might not use a proper it firm, and things like that, you know, which might be you know, underestimate. And this is the type of thing we would look at, as part of our sort of budget in forecasting, because I think that’s the most important thing is the buyer building their own for taking sellers if they’ve got it? Normally, they haven’t. So we’ll have to do it from scratch, but then taking it and building their own as to what they think needs in now they might choose to then, you know, sometimes it might be in material, like the 55 300,000 pounds here isn’t going to materially change the deal. But it is a cash impact. Yeah. And ultimately paying back loans isn’t a profit impact is a cash impact. So it’s all a cash impact of what the cash flow will do after acquisition.


Kush Birdi  14:51

Yeah, well, cash is king. And, you know, particularly post acquisition that immediate period is obviously critical right now. And that’s what buyers are looking at. straightaway, right? Yeah. So yeah, really important. So on the due diligence side do you? Do you work closely with the lawyers as well into the due diligence process? Or do you kind of just do it as a side? Because usually the seller side will set up a data room, like a sort of an online, sort of Portal to host all the pay the documentation, disclosure documentation? And would you usually have access to that? And and sort of be able to review everything? There? Yeah.


Julie Wilkinson  15:34

I mean, we do like to keep in contact with all the advisors on the deal, because ultimately, in the end, they might share information, I suppose, where we have our biggest involvement would be warranties. So what we do, obviously, I know there is normal standard clauses, and maybe it’s something you could touch on is what are the normal standard warranties. So for instance, tax is usually a warranty that, you know, if there’s a tax audit for historic tax, the Senate is usually liable. But sometimes we might find specific things where we might recommend additional warranties, more full disclosure, I don’t know whether and this is why we lies with the solicitors because we don’t always know is it a warranty? Or is it in the disclosure knows where the best place to put it is, but like, as an example, you know, if they’ve got invoice factoring, and we’ve done the reconciliation on the balance, sheet integrity, and they can’t reconcile the number, there’s a risk. Yeah, and the discrepancy will be a percentage risk. And if we see big risks, well, ultimately is down to the buyer if they want to proceed, because this would be times when would the buyer is there a time if the sellers books are so bad with the buyer Palau, but ultimately, that’s then down to we wouldn’t ever tell the buyer what to do, ultimately, they can choose their own risk profile. But we would just highlight and if we did see, if they did want to continue, we might say we might recommend an additional clause. Obviously, it’s then down to them to work with the so we would probably say it in communications, we would then expect the solicitors and then the right the right terminology. Because we don’t know the legal terminology to put to protect them. Yeah, absolutely. And we have done that. And it has words, because the reason we do it, though, is we’re not we would let the the solicitors write the legal words, obviously, most parts don’t understand the legal terminology, we would focus more on explaining to buyer and seller, the reality behind what we found both of them so that seller understands the risk as well. Because ultimately, if it happens afterwards, you know, if something does come through tuition, it the seller might not Oh, yeah. Well, they did explain that it might make it easier to have those conversations about having to go down the legal route to enforce it afterwards. Yeah. And then obviously, we would expect the solicitors more to write the legal to protect the buyer from that element of it.


Kush Birdi  17:40

Yeah, absolutely. And, you know, we frequently work with, you know, different types of accounts on that where we’ve, we’ve had feedback, oh, you need to put this protection in there. Go and put it in right way or whatever, we might draft it and say, Do you think this wording is okay, is this wide enough? Or whatever? And to an extent, you know, to extend you might not, but I think yeah, working together, as always, always good. And I think it’s just about getting the right protection. Yeah, but even you know, talking, you know, when you were talking about just explaining the implications to the buyer, even if there is legal protection, I suppose you still got to deal with it. In the first instance, you might have been able to enforce a contract, but you didn’t got to go and enforce it. But in the meantime, you’ve then potentially got an issue to deal with. So I suppose those are the conversations you’re having in terms of saying, Well, how you going to deal with this, whilst then enforcing this contract? Obviously, we deal on the deal with the enforcement side of it. And then in terms of, I suppose, usually, if if if the price is subject to an adjustment based on the financial position on the completion Day, which we call completion accounts process, we would usually require or request input from people like sales on sort of what those you know, how quickly they can be produced the completion accounts and whether there’s any specific policies that should apply to formulating those. Do you support with all that as well?


Julie Wilkinson  19:10

Yeah, well, this is I mean, it’ll depend what we do with the buyer when they’ve bought the business and who the accountants are and bookkeepers and things like that. I mean, ultimately, normally a bookkeeper will transact so that can be and we have bookkeepers now so if you know someone’s just don’t deal one or deal two, we do often become like an outsourced bookkeeper. I suppose if they’ve, if the accountant and the bookkeepers have transacted quite well within the acquisition process, it might be we don’t need to do that afterwards. Now our automate isn’t always to do everything. You know, sometimes some are better than others. Sometimes it has been really poor. Sometimes it’s been okay. And we often on the integration will sometimes we do mentor train and help onboard junior staff as well. So if eventually people need it internally, then like we can help them do that or we would help work with the staff that are already Be There. And maybe our role might be to help train and oversee them. If then if maybe there are some risks in it. So I think it will just depend who the team are on top it might be they do it and then we review it as a secondary check. Or it might just be the they didn’t really have a team do it was an internal admin doing the bookkeeper, and they just need the support, and then we would come and do it. So it would just depend on who the who the team are. But I think one of the biggest problems we see in acquisitions, people trying to promote people, because it seems like the easiest thing to do, you know, we’ve seen people promote, you know, finance staff, to maybe finance managers, and they don’t really have, it’s unfair, because they haven’t got the skills and expertise at that time to do it doesn’t mean they can’t study to become it, but it could be unfair on them. And we also see, you know, people being promoted to managing directors and CEOs and things like that, just because they’ve been in the business 20 years, but they might not have the skill set to do that job. And I don’t and you know, again, sometimes it comes down to make people do it for admin reasons, that simplicity, it’s just easier to promote someone. Yeah. And but this is why they know they want to have good conversations and due diligence to get a gauge of who the employee is hired to see, do they think there’s anyone capable, you know, if they don’t think there’s anyone if their gut is telling them, the buyers, there’s got to tell them, they haven’t really got that person, either someone, the seller stays on for longer and train someone up Is there someone close to ready, and if there’s just not that person, and they might just have to recruit. But it’s not always but you know, time you know, in the end, once they become busy after the acquisition, that’s why you need the support post, you know, post acquisition as well. So I just want to say thanks, Chris, for coming on. The podcast has been really great. And if anybody you know, needs help with legals, where can they find you?


Kush Birdi  21:51

Well, you can find me lots of places, social media, so I’m quite active on LinkedIn. So don’t hesitate to DM me on there or even Instagram, we are on Tik Tok, we’re trying to get better at that. Otherwise, you can contact me by email and Cush, KU sh at birdie law.com. And always happy to sort of have a chat with no charges involved for an initial chat, so don’t hesitate to reach out.


Julie Wilkinson  22:20

Thank you. And I just want to say thanks to all the listeners on the building exit podcast. We’re nearly at 3000 downloads now. And we’ve just set up a new YouTube channel. So if you love the episodes, hit the subscribe button so more viewers can find our channel. See you soon. So once again, thank you so much for taking the time to listen to our podcast. I hope you found it useful. If you think there’s anyone else in your network that might benefit from our podcast, then please share it with them even just click the link and send it to them or send it in a Facebook group or other social media channel. Don’t forget to subscribe. So other podcasts come to you directly as a when we launch them. So I’m really looking forward to seeing you next time. We’ve got some really exciting things coming up. And we’ll see you again soon.