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As the law of natural selection is takes its course
throughout the corporate world, mergers, acquisitions
and disposals will be key to who survives. With renewed
hunger for growth throughout the markets, and unspent
cash sitting in the bank, 2003 has the potential to
be an exciting year.
Whether acquiring, merging or disposing, the common
issue is getting the best deal. This means gaining
the right intelligence, identifying the potential
risks and of course, deriving the optimum solution
to these risks, once the deal has gone through.
Where does property fit in?
While due diligence has advanced from its traditional
accounting focus, to include a number of core business
perspectives, such as commercial, legal, and environmental,
the issue of property is not taken as a stand-alone
issue. In fact, most deals are concluded based upon
the most limited information such as the number of
properties, the rent currently being paid and the
next rent review.
When we consider that property is generally the second
highest annual cost to a business this is cause for
concern.
When we take into account, financial standards (such
as FRS12), onerous leases, conditions precedent (to
name just a few), the total property liability to
the business, may far exceed the value of the business.
For example a software company may be acquired for
£4m, but with a hidden property liability of
£18m. Put this way, the software company has
effectively become a property company!
Property
Diligence
Property is often seen as an inflexible liability
as opposed to a potential strategic asset. Uncovering
and investigating the threats and opportunities ahead
of acquisition, may substantially aid negotiations.
Property diligence is designed to create clear vision
of the post-acquisition property portfolio. Evaluation
must include assessment reflecting the following related
areas:
• Financial
• Legal
• Human Resources
• Operational
• Tax
• Environmental
• Commercial
Armed with both best and worst case scenarios on the
specific property issues, a true assessment of the
potential liabilities can be concluded.
Shareholder / Stakeholder Value
With property liabilities increasingly having
to appear on balance sheets, the efficient management
of property, has a direct effect on how shareholders
and stakeholders perceive the management of the company.
Recently this was illustrated when a major British
PLC’s share price spectacularly plummeted, when,
following the announcement of a major staffing restructure,
shareholders identifying the correlation between staff
numbers and property, turned their attention to the
property liabilities (quoted alongside network liabilities)
on the balance sheet, which were valued in terms of
billions. Shareholders had hitherto been unaware of
the extent of the liabilities and voiced their concern
in public condemnation for the board of management.
But of course by then it was too late.
In contrast, efficient and specialist management of
property issues can result in hundreds of thousands
of pounds of liabilities being removed from the balance
sheet.
Conclusion
Far from being an inflexible liability bundled
into an acquisition, or a necessity to operate, property
has a very strong strategic role to play, both in
terms of negotiation, and how your stakeholders perceive
your management of their company. As with all strategy
the key to success is clarity of vision, managing
the risks, and controlling the situation.
Reduced expenditure and financial gains derived through
effective management of property, will impact directly
on the company profit - something that all businesses,
and shareholders would like to see more of, in 2003 |
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