Spring 2006

In this issue

Strategic acquisitions: Part One

Meade King news

Options after bankruptcy

Agency Commission Compensation/Indemnity

Increase in scope for overlap in Discrimination Claims

Round-up of increases in pay awards:

Back to Newsletter Archive

Strategic acquisitions: Part One

An acquisition could transform your business overnight by allowing you to take advantage of new economies of scale, or diversify into new areas. It might enable you to acquire bigger and better premises or customers/clients or strengthen your management team.

However, an acquisition can also bring problems, using up finite and costly financial and management resources from your original business. You need to work out whether the acquisition will add value to your business, after making realistic allowances for all the hidden costs. To be successful, it will need to bring a number of benefits to your business.

This article is the first of two that will look at the following topics:

• The advantages of making a business acquisition.
• How to use an acquisition to expand your business.
• How to use it to reduce your costs and risks.
• The pitfalls and problems of an acquisition and how to avoid them.

Where are you going?

First of all, it is vital for you to have clear aims and objectives. Acquisitions are more risky than organic growth.

You need to be clear about what you need, and what you expect an acquisition to do for you, before investigating possible takeovers.

You should start by doing a SWOT analysis i.e. identifying your Strengths, Weaknesses, Opportunities & Threats.

• What are your Strengths?
  • Can you enhance these? Can you take the risk of diluting them?
  • How creative, expert, and customer orientated are your employees?
  • How good are your products, your market position and your market share?
  • Do you have advantages in technology or production processes?
  • Do you have financial strength?
• What are your Weaknesses?
  • What is your market position vulnerable to?
  • Are your finances overstretched?
  • Are your overheads - administration, premises and so on - taking too high a proportion of your income?
  • Do you have significant management weaknesses?
  • How could you rectify them?
• Where are your Opportunities?
  • How can you take advantage of them?
  • Do you have a solid market position, good products or a reputation that could be more fully exploited?
  • Do you have a capable management team, with experience in turning round underperforming companies?
  • Do you have under performing assets or resources?
  • Are your competitors vulnerable?
• Evaluate the Threats facing you.
  • How can you counteract them? Is your market static or declining?
  • Are you facing new and aggressive competitors?
  • Are you over-dependent in a critical area - for example, on a particular employee or customer?
  • Are you subject to cost pressures that you cannot pass on to your customers or clients?

Having completed this SWOT analysis, you can then start to compare the benefits and risks of an acquisition with the alternatives. In this article we look briefly at three of the seven areas that need to be covered and in the next issue we shall examine four others before contemplating the alternatives.

1 Reducing your costs

If turnover rises, you should be able to achieve substantial economies of scale which show as greater profitability.

• You can make better use of overheads, both fixed and variable.
  Making savings in central functions, such as finance, administration and personnel, is often quoted as a reason for making acquisitions. Look for similar savings on premises, distribution, sales and marketing. If the buyer and the target are in the same sort of business, savings on manufacturing or delivery mechanisms might be possible.

It may also be possible to cut out some management salaries but care is needed to avoid cutting out talent which your business could use.

• The increased size of your business should give greater negotiating power when it comes to purchasing.
  Bulk buying should lead to lower purchase prices for your stock. You may also be able to negotiate better terms from your bank.
  You may enjoy some of these benefits even if you buy a business in an unrelated area or if the product is different but the technology involved is similar. However, the more closely related two businesses are, the more scope there will be for major benefits. If there is no overlap at all, the acquisition is unlikely to make sense strategically.

2 Expanding your business

If you integrate another business into yours, both could benefit from the ensuing expansion.

• You should benefit from opportunities to invent, develop or introduce other products. A broader customer base also makes successful new product launches more likely, but beware the risk of losing your successful product or service focus to date.
• You could improve the brand image of your company. Bigger companies are often believed (rightly or wrongly) to be more reliable, and you should get better public perception of your products and/or services, but beware the risk of acquiring an impersonal or remote appearance.
• There may be opportunities to cross-sell to one another's customers. This may be difficult if the two businesses have conflicting cultures and systems. e.g. the length of the normal sales cycle with which customers have been familiar can also be a major cultural factor.

3 Diversifying to cut risks

An acquisition could help you limit or offset the risks in your existing business.

• You might want to diversify your product or services line. You may be relying too much on one product or service and some of your products or services may be coming to the end of their life cycles.
• You might also want to consider market diversification. An acquisition could help you open up export sales, or reduce your dependence on just a few customers.
• Acquisition could help to stabilise work flow, if you have a seasonal peak in activities.

In the next edition of The Orchard, I will be looking at defensive strategies, and at acquisitions as a way to build the net asset value of your business or beef up the quality and quantity of your management team. Some commonly encountered takeover traps will be considered, including one recent nightmare acquisition by a well-known truck manufacturer. Lastly some alternatives to a takeover will be referred to. Stay tuned!!

Laurence James is a Corporate Finance Partner at Meade-King and can be contacted on 0117 923 4044 (direct line) or emailed on

Return to top

Meade King news

We are delighted to announce the appointment of two new recruits to the practice.

Sheila Hardingham has joined the firm's Commercial Property team. Formerly a partner at Holt Philips, Sheila has over 25 years experience and offers particular expertise in landlord and tenant law, including retail, offices, pubs and mixed developments. Sheila typically acts for overseas investors, national land-owning pension funds, breweries and house-builders. Known for her practical approach to solving legal problems, she enjoys a well-deserved reputation for getting the job done.

Elaine Windust joined us in April as our new HR and Training Manager. She is a Chartered Member of the Chartered Institute of Personnel and Development (CIPD) and has worked in HR for nearly twenty years in both public and private sector businesses.

Elaine will be working with us to support the development of our people within the business and is looking forward to make presentations to our client group on a range of HR practical issues affecting businesses.

Return to top

Options after bankruptcy

It's that time of year again with councils announcing the latest inflation-busting increases in council tax payments. If newspaper headlines are to be believed, since Labour came to power in 1997 the average council tax bill has doubled. Central government influence has not only affected the level of tax - the council is expected to collect 98% of the total amount due within the financial year.

Such pressures appear to have had an impact on the collection strategies of councils: in recent months we have seen a noticeable increase in the number of bankruptcies arising out of council tax arrears.

On the making of a bankruptcy order the individual's assets "vest" in his or her trustee in bankruptcy who must realise them for the benefit of all creditors. An individual being pursued for council tax arrears will usually have owned a substantial asset at the date of the bankruptcy order - the property in respect of which the tax was being sought. From the date of the bankruptcy order the trustee is able to sell the home and use the equity in it to make a distribution to creditors (although a sale will be postponed for a year if the bankrupt's family lives in the property).

The priority for the debtor will be to ensure that the family home is not sold. The first option is to purchase the trustee's interest back. This may be achieved if a relative or friend is able to advance third party funds, or it is possible for a bankrupt to borrow over the property despite the fact that he no longer owns it. However, since property inflation has outstripped even council tax inflation the equity in the home will usually be such that this option can be very expensive.

An alternative solution is to "annul" the bankruptcy. The effect of an order of annulment is as if the bankruptcy never happened, and so the property never "vested" in the trustee in bankruptcy. One ground for requesting an annulment is that the debts and expenses of the bankruptcy have been paid in full. Such applications have become a particular specialism of Meade-King in recent years, and it is often the case that this process is significantly cheaper than purchasing the trustee's interest. It should be borne in mind that all of the debts and expenses (not just the petition debt) need to be paid.

Important points to remember:

1. A court can make a bankruptcy order against you if you owe a creditor more than £750
2. If you owe more than £750 to a creditor at the date the petition is presented, but you "pay down" so that you owe less than that amount by the time the petition is heard, a court can still make a bankruptcy order. In a recent case an individual was made bankrupt owing only £650
3. Whilst the insolvency legislation provides that the debtor must be personally served with a petition, a court is able to order that mere posting of a petition can be sufficient if it is told that an individual is avoiding personal service
4. It is always possible to ask the court to annul the bankruptcy

If you have any concerns about bankruptcy or other insolvency issues, please contact Keith Mahoney on or Chris Mitchell on

Return to top

Agency Commission Compensation/Indemnity

Regular readers of the Orchard will recall our earlier review in which we highlighted the uncertainty in the English courts when assessing the compensation to which sales agents are entitled under the regulations which were introduced into England in 1993.

The Court of Appeal has at last been asked to consider this issue and has very clearly stated that the earlier decisions had all been wrong and that judges had been unduly influenced by the approach of the French courts.

The Court of Appeal have instead held that an 'English approach' should be made when assessing the compensation paid to an agent on termination of his agency. The court has ruled that the principal head of claim should be calculated as a sum equal to the value of the goodwill of the agency and any other expenses that the agent had incurred but had not had a reasonable opportunity to amortise.

The courts will in future now have to rely heavily on expert opinion in valuing the goodwill. However, it would be difficult for a valuer to refuse to recognise the fact that goodwill would be expected to reduce as the term of the agency draws to an end. No doubt this will be the subject of separate court proceedings at a later date.

The right of commercial agents to compensation on the termination of the agency agreement is the default position under English law. When appointed, agents can be asked to opt that an indemnity replaces the compensation provisions. The advantage of the indemnity basis to employers is that the indemnity is capped to one year's average commission whereas compensation which the courts will now assess as being the value of the goodwill of the agency business is uncapped and could very easily exceed a single year's gross commission on termination of the agency relationship.

Please call James Hawkins on 0117 926 4121 or e-mail him if you would like to discuss which means of protection you applied to existing agencies and which might be most appropriate for new appointments.

Return to top

Increase in scope for overlap in Discrimination Claims

A C Redfearn v Circo Ltd. t/as West Yorkshire Transport [2005]

This case attracted much media attention in 2005 and is set to be one of the most high profile race discrimination cases for this year. During February 2005 the Employment Tribunal ("ET") heard complaints brought by Mr Redfearn, a British National Party ("BNP") member, for direct and indirect race discrimination by his employer.

Mr Redfearn was a driver and escort for passengers with physical and learning disabilities in the Bradford area. The majority of passengers and a significant number of the employer's workforce (approximately 35%) were Asian. Though described as "a perfectly satisfactory employee", Mr Redfearn was dismissed following mounting pressure from union representations after the union and employer discovered that he was a active member and local authority councillor for the BNP. This case demonstrates the ever-increasing complexity of discrimination claims and the scope for overlapping discrimination and thus multiple complaints.

Mr. Redfearn argued that the wide definition of 'racial grounds' (s.1(1)(a) of the Race Relations Act 1976) together with the previous line of cases that had established the need to interpret 'racial grounds' widely, meant that he need not belong to a particular race to complain of discrimination provided that the reason for less favourable treatment was founded in some way on racial grounds.

The ET concluded that the employer's rationale for dismissal in this case (being 'for health and safety' reasons) was founded in a fear of violence in the workforce arising from Mr Redfearn's political beliefs. In consequence, they decided that there was no direct or indirect discrimination on racial grounds. Mr Redfearn appealed.

The Employment Appeal Tribunal ("EAT") heard the appeal in July 2005.

It relied on the decision in Showboat Entertainment Centre v Owens [1984] and subsequent authorities which established that "racial grounds" must be defined broadly and is capable of including the reason for an action based on race whether it be the race of the person affected by the action or not.

The EAT also relied on a House of Lords decision in Nagarajan v London Regional Transport [1999] which held that discrimination can be established if racial grounds had a significant influence on the outcome and held that Mr Redfearn was entitled to rely on Race Discrimination Legislation.

The EAT also criticised the Tribunal for failing to have carried out any critical evaluation with regard to the employer's case for health and safety and therefore found that their conclusion could not be upheld. The ET decision was quashed and remitted to a different Tribunal for rehearing.

The employer will argue that "racial grounds" does not provide protection for a person's racist views and that the EAT's decision means that a person who has expressed racist views can successfully claim that they are being discriminated against on the grounds of race if the employer takes action against them because of expressing those views.

It is also likely that the Commission for Racial Equality will raise an argument that any discrimination against a BNP member because of their views was not within the terms of the Race Relation Act at all. This however opens up the possibilities for such claims being brought under the Religion and Beliefs legislation which also prohibit discrimination.

Stop press: The appeal has been heard but judgment has been reserved. Watch this space!

Mohmed v West Coast Trains Ltd.

This will probably be the first religious discrimination case to go before the Employment Appeal Tribunal. Mr Mohmed is a Muslim who claims he was dismissed by Virgin Trains as a Customer Care Assistant for refusing to shave off his beard which for religious beliefs he wore 8 inches long. Virgin's dress code requires beards to be no more than one fists length. The ET dismissed his claim for direct discrimination finding that a prima facie case had not been made out. The EAT has agreed to hear an appeal and it is anticipated that the case will look at the burden of proof in the case of discrimination of grounds of religion or belief; and the required approach where claims are brought for both race and religious discrimination. Watch this space too!

For further information on this or any aspect of Employment law please contact Nicola W Hughes at or on 0117 926 4121

Return to top

Round-up of increases in pay awards:

1st February 2006 the limits on Tribunal awards were increased as follows: the maximum compensatory award for unfair dismissal increased to £58,400 and the statutory limit on a week's pay increased to £290. This is the relevant figure for calculating the basic award and the statutory redundancy entitlement.

1st April 2006 maternity, paternity and adoption pay increased to £108.85 per week under the Social Security Benefits Up Rating Order 2006.

2nd April 2006 Statutory Sick Pay rate will increase to £70.05 per week.

For further information on this or any aspect of Employment law please contact Nicola W Hughes at or on 0117 926 4121

Return to top

Whilst every effort has been made to ensure accuracy, information contained in the Orchard may not be comprehensive and should not be acted upon without professional advice.