Caveat Emptor
2008-01-03 | Filed Under Uncategorized |
Caveat Emptor
If you are with a company that is considering acquisition of another company in our industry and you are responsible for conducting due diligence relative to such an acquisition, consider the following:
1) A company looking to be acquired is likely to begin by stripping down their overhead so as to make profitability look better than it has previously been. In doing so, such a company may, in the stripping down process, eliminate overhead that has historically been vital to new business development. The consequences of such a move would not necessarily be apparent to a potential acquiring company, but could have disastrous longer term drawbacks.
2) If a company looking to be acquired has been postured and promoted for acquisition for a longer period of time, such a company may be obligated (relative to the interests of potential suitors) to provide demonstration of their growth potential via the securing of contracts with newly acquired customers. When this is the case, the company that is eager to be acquired may enter into new business contracts that virtually give the business away in that the newly acquired business involves substantially compromised, if not non-existent profitability. This too may not be apparent to those conducting due diligence but could prove to be disastrous to the acquisition investor.
3) Based on the conventional purchasing practices of customers in some sectors of the graphic arts, it is sometimes customary, when entering into contracts with graphic service suppliers, to mandate or accept a “preferred customer” contract clause, which stipulates that the supplier will not provide lower pricing to any other customer. Typically, supplier compliance with such contract clauses are “taken on faith” and continual proof of supplier compliance with “preferred customer” contract clauses are not required.
4) The language of “preferred customer” contract clauses is often vague and does not address supplier work-around tactics such as the offering of “rebates” to newly acquired customers based on annual volumes of business. Although the annual volumes of supplier business for newly acquired business may be substantially lower that those of “preferred customer” contract customers, “rebate” pricing tactics with new business customers can result in graphic services pricing for newly acquired companies that is notably lower than is the case for service receiving companies with many times the new business customer’s volumes of business.
5) Graphic services receiving customer companies, who have mandated or accepted “preferred customer” contract terms should require their service providers to continuously prove their compliance with “preferred customer” contract terms and should require their service providers to provide addenda to such contracts which stipulate that “rebate” schemes and other forms of contract term work-arounds do not and will not exempt service providers from providing lower pricing to other customers.
6) In the event that a graphic services provider has been found by its customer to have violated its “preferred customer” contract clause via rebate pricing or other similar schema, the customer company should demand retroactive adjustment of its received pricing, relative to the pricing provided to other service receiving companies.
7) Graphic services companies considering the acquisition of other graphic service companies should consider the future revenue of the company they wish to acquire relative to the potential retroactive pricing adjustment of “preferred customer” contract clauses due to “rebate” or other similar schema. Particularly in the case where the duration and volume of business of the company whose pricing is to be adjusted constitutes significant retroactive, current and future profit losses.
Caveat Emptor.
Mercurius Wotan
Post Linx
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