SI Review: August 2012

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Benefit of Counsel

Global Acquisitions

Key considerations when buying an international staffing firm

By Kevin Barrow and Matthew Bodfield

Acquiring a company already established in several countries can provide instant access to new markets. While such a deal is inherently more complex than a domestic acquisition, there are ways to reduce complexity and problems. Here are things to do and consider to accelerate ROI, maximize the process and avoid common pitfalls.

Accounting and taxes. The tax analysis of the acquisition will need to factor in not only acquisition taxes, but also post-acquisition tax costs. The taxation and reliefs available for cross-border income flows are complex and often drive complicated acquisition structures. It is important to begin work on this analysis early in the process.

Further, differing accounting standards can lead to misunderstanding over the accounting treatment of certain items, or disagreement over whether financial facilities used for cash flow purposes should be classified as debt. Advisers with expertise in the recruitment and staffing sector will understand and can help to solve any conflict.

Liability. Know your target’s wage withholding tax exposure, including potential worker misclassification liability. In January, U.K. staffing company Reed lost an appeal against an unexpected tax assessment of $170 million relating to worker misclassification. To avoid inheriting this sort of exposure you need to understand the supply chain, local tax debt transfer laws and the relationships with the European equivalent of PEOs (often called umbrella companies).

Regulatory compliance. Many overseas jurisdictions have strict licensing requirements, with buyer concern focusing on whether target companies are operating within the terms of their licences, that the operating model used is legal (and fit for purpose) and will continue to be so once a change of control occurs.

While local employment and labor laws can be tricky, they are generally not as problematic as the tax, social security and other regulatory factors. One key issue for U.S. buyers to note, however, is that post acquisition restructuring of workforces can be a more complex and costly process in some countries in Europe than it is in the U.S. If restructuring is a key part of the business case for the deal, the costs should be worked out and factored into pricing.

Key contract analysis. Review key contracts of the target company, including uninsurable indemnities, margin reduction deals and rebates, and margin-only arrangements. Further, watch out for MSP arrangements in which the MSP is seeking to oust all independent suppliers. Smaller and mid-tier local staffing companies are facing significant market pressure at key clients.

Warranties. Full trading and tax warranties will form a considerable part of the buyer’s protection under the purchase agreement. You will find, however, that the basis of recovery for breach of warranty, the limitations that might apply to them, and the ability to disclose against them are often subject to very different market norms. Local counsel will be able to assist in navigating a way through any gap between buyer and seller expectations.

Post completion planning. Consider carefully any earn-out structures, which are an area of inherent conflict between buyer and seller, as control of the target business post acquisition can influence the success of the earn out.

Non-compete covenants are another important tool in post-acquisition protection, but their enforceability is generally limited to two years in the U.K., a period many U.S. acquirers find surprisingly short. Restrictive covenants within employment contracts are generally shorter still. Local advice is always required in determining the enforceability of any restrictions imposed.

Kevin Barrow is a partner and Matthew Bodfield is an associate in the staffing sector team at international law firm Osborne Clarke. They have advised on 14 staffing company M&A deals in Europe in the last two years.

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