According to figures compiled by National Statistics, the amount of cash splashed on deals involving UK companies in 2006 climbed to a staggering £140.9bn from £108.1bn in 2005, and industry experts believe the boom will surge forwards into 2007.

A survey by Morgan Stanley found that European finance directors now rank mergers and acquisitions as their number one priority, while Standard & Poor's has forecast higher premiums for deals through the course of the year. What this all means for sellers is that there is a big war chest of money out there looking for businesses to snap up.

For buyers, interest rates are low, debt is cheap and corporate balance sheets are robust. Yet in these heady times, businessmen, particularly finance directors, should not lose focus.

FDs in the buyers camp should not use the abundance of surplus funds as an excuse to overpay for a target, while those working for the sellers should continue to push for the maximum price, no matter how tempting a first offer may seem.

Buy low

The good news for acquirers of businesses is that capital is freely available and that war chests have become so large that businesses, which were completely off the radar a few years ago have now become realistic targets.

Yet the competition for target companies is more fierce than ever, the turnaround time for rounding up a deal has shortened dramatically, and the margin for error in paying the right price is a fine one.

A poll of 101 corporate executives conducted for KPMG by MORI found that 43% of those surveyed believed that the cost of acquisitions had increased because buyers had to build in the financial benefits of half the perceived synergies of a deal.

John Kelly, head of integration advisory at KPMG, says this shows that the FDs of acquisitive companies need to be sharper than ever when plunging into the M&A market.

'The sell-side now runs tight auctions with tight deadlines,' Kelly says. 'Any purchaser seeking to transact deals in this environment is likely to have to make decisions with limited time and access. Winning the deal is only half the job. The chief executive is going to be worried about how to make the deal value stick and finance directors will want early assurance on exactly what they have bought.'

For Steve Lucas, FD of acquisitive FTSE 100 energy giant National Grid, precision can only be achieved through discipline and rigorous attention to detail. 'You don't make money by just buying businesses, you make money by buying businesses and then managing them better than they were managed before,' Lucas says. 'Discipline and patience is crucial. You have to be absolutely rigorous about going through your numbers. You have to be absolutely rigorous in your follow-through.'

Ian Leaman, director at Buckingham Corporate Finance, says that thorough and intensive scouting Ð not only of the target company but also the market it operates in and the competitors which may come up with rival bids Ð is the only way to ensure that every detail is covered.

'If your adviser is plugged into the right databases, there is a wealth of information available on a company, its market and rival bidders. At a very early stage, a buyer needs to collect this intelligence,' Leaman says.

Accessing this data provides the foundation of any bid, Leaman adds. A company's details will reveal the strength of its underlying cashflow and future prospects. An analysis of its price/earnings ratio compared with the multiples of listed companies in the same sector will provide an idea of what to pay.

Market information offers details of other transactions in the space and what sort of prices and multiples are involved.

Finally, the details of rival bidders provide a picture of what sorts of rival bids can be anticipated. If a trade buyer is in the picture, the price could go higher because of the perceived synergies. Financial buyers will need a standalone business, and so might not be able to bid as high.

Leaman says buyers should constantly be weighing up this information against the post-acquisition risks. 'Acquiring a business involves such a wide range of variables that it is impossible to go into a bid with a maximum price in mind. All plans have to be kept under review, but if the risk of the deal becomes too great, then you have to cut your losses and walk away,' Leaman says.

Sell high

Selling a business involves much more than simply waiting for buyers to queue up before handing over the business to the one with the deepest pockets.

David Brooks, head of mergers and acquisitions at Grant Thornton, says that a business needs to be groomed ahead of sale.

The most important factor to consider is how a business will shape up once the owner has sold out and taken their leave.

'Before you put a business in the shop window you have to install a second tier of management to run the business once the owner has moved on. It is no good if the owner leaves with all the key contacts and knowledge. There needs to be a sustainable management team in place to continue running the business,' Brooks says.

Chris Grove, corporate finance partner at BDO Stoy Hayward, says proper due diligence, conducted by the vendor, is another essential component to have in place in preparation for a sale.

Such preparation provides bidders with reliable information they can use to put forward the very best bid they can muster. It also provides the seller with control over the process, as they know what information bidders are basing their decisions on.

'Due diligence is an inevitable part of any sales process. Sooner or later potential vendors will be using vendor due diligence as a matter of course to remain in control of the sales process,' Grove says.

Then there is the issue of timing. No matter how good a business is, there are market cycles that have to be taken into account in order to leverage the best price.

'If you sold a care home business four years ago, you would have taken a multiple of eight or nine times earnings. If you sold that business today, you would take a multiple of 13 or 14 times earnings. That shows how important market timing is. Business moves in cycles and those cycles need to be recognised,' Brooks says.

Sometimes, non-financial factors also have to be taken into account when making a sale. Owners may want to protect employees, customers or suppliers after they have moved on, and this should have influence on the sale process.

Brooks says careful consideration needs to be paid to how key staff and customers will react to news of a sale.

'Discussion and communication is a necessity when about to embark on a sale. An owner needs to decide when the best time is to let staff and customers know about an upcoming deal. It can be a delicate topic and requires sensitivity and experience,' Brooks says.

Then there is the issue of taxation, particularly for the seller.

'Tax planning is a must. Taper relief is not always as simple as people assume and there is also inheritance tax to be considered. Tax is complicated and requires expertise,' Brooks adds.