INTM576010 - Thin capitalisation: working a case - knowledge and negotiation: Getting to know the business

As emphasised in the suggested questions in INTM575050, it is vitally important to get a thorough understanding of the dynamics of the business, preferably from the people who run it. This is because a detailed knowledge of the business is important in coming to a decision as to what constitutes an arm’s length position. This depends on the profitability, the cashflow, the investment requirements, shareholder expectations, the present and future shape of the market, and the amount of debt which would reasonably be sustained at arm’s length by such a business. No comparables will yield as much information and guidance as looking closely at the business under review. Knowledge of the working of a business also helps with understanding historic results and the extent to which those are useful in projecting the future. Accumulating knowledge of how individual businesses operate will also enhance broader commercial awareness and feed in to other cases.

This sort of knowledge is best acquired face-to-face, even where the facts have been laid out in writing at some length. Facts on paper can explain how a transaction took place, but not really bring to life the reasons why. Wherever possible, one or more representatives of the business should be present at the first meeting (and probably subsequent meetings). These should be people who are capable of answering in detail questions about the way the business is run, how priorities are set and how the decision-making processes work. Achieving this understanding should be high on the agenda early in the enquiry.