CORPORATE MERGERS AND ACQUISITIONS

How to sell
a company?

At some point, every business owner may consider the possibility of attracting a new owner for their company, which has been developed with care and hard work. Typical triggers for corporate divestment include owners’ age, health issues or simply a desire to pursue new avenues and challenges.

For the owner, selling the company is one of the most important events in the company’s entire life cycle. A successful sales transaction allows to realize the value, built up through years of hard work. However, the sales process may also be a disappointment, and mistakes made in the process can spoil the final outcome. How to ensure that this important event proves to be a success for the business owner?

Step one: preparing the company for the sale

The company needs to be thoroughly prepared for the change in ownership. This means putting all of the company’s processes and financial accounts in order, early communication with suppliers and customers, and in some cases renewed measures to ensure compliance with laws and regulations. In the case of small and family-owned companies in particular, daily operations often rely on unwritten rules and conventions, the transfer of which might be confusing for the new owner without proper documentation. There may also be agreements with partners or even employees that have not been renewed or are merely verbal. Also, financial statements might contain surprises that deprive value. At the same time, there might also be hidden values in the company that go unnoticed in daily operations or are considered of minor importance – but which may be a significant stimulus for the buyer.

Early preparations for a divestment help maximize the value prospective buyers may be willing to pay and contributes considerably to the execution of the process. Even small deficiencies and errors in the company’s documentation and internal processes can have a negative impact on the rationale of a prospective buyer, reducing the probability of a transaction or even impeding its completion. It is always wise to involve external advisers already in the preparatory phase of the sales process, as their experience helps eliminate potential bottlenecks and avoid unnecessary changes.

Step two: finding potential buyers

Once the company is prepared  for sale, the next step is to determine the proper transaction structure, prepare sales materials and identify potential buyers.

A properly selected transaction structure supports the whole sales process and helps achieve a good price for the company. It is useful for the seller to choose the most appropriate transaction structure together with the adviser and propose it to potential buyers. Professionally prepared sales materials help communicate the value of the company to potential buyers and prevent possible drop-out of investors during the early stage of the sales process. They also save the seller’s and  buyer’s time, ensuring a faster transaction process. A properly selected and sufficiently long list of potential buyers keeps the costs of the process under control and increases the likelihood of a successful transaction. The adviser will also help prepare the necessary data set for the subsequent due diligence process, preceding the transaction execution.

In the second stage of the transaction process, the interested buyers are given an opportunity to examine the company in greater detail as well as meet the management team. At this stage, a well-prepared company and transaction will facilitate the process and saves considerable amount of time. The due diligence materials on the company (the dataroom), the purpose of which is to enable the potential buyer to thoroughly examine the company, must be comprehensive, help answer questions the prospective buyer might have and mitigate the risks that might arise, rather than create them. The due diligence process is of paramount importance, as it determines the interest from  buyers as well as the valuation of the company, and a central element to this is involvement of a professional adviser in the early stages of the process.

After the due diligence analysis is complete, the parties usually enter into final negotiations over the transaction terms and the sales agreement.

Step three: pricing

In most cases, there are certain established valuation approaches that determine the company’s values, and buyers are usually well-aware of them. Unrealistic expectations of the company’s value make the sales process more difficult or even halt it in the early stages. Therefore, it makes sense to discuss the possible valuation level with engaged advisors already in the preparatory phase of the transaction. It is reasonable to use a different transaction structure for different companies, depending on the company’s situation, economic cycle, the degree of the owner’s involvement in the company, the involvement of professional management and other factors. The simplest transaction, in which shares are transferred in exchange for money, may not always provide the best result. It is therefore wise to use the help of experienced advisers both in the selection of the transaction structure and in the determination of the company’s fair value and its presentation to buyers.

Step four: closing the transaction

After the company’s sale contract is signed, it is often necessary to perform certain activities before closing the transaction. For example, it may be necessary to modify, supplement or terminate some cooperation agreements or refinance existing loans. It may also be necessary to renew agreements with clients, suppliers or cooperation partners. Companies with a higher market share and/or larger companies need approval from the competition authority to complete the transaction.

The transaction is closed once the conditions set by the seller and the buyer are met. Normally, closing means transferring the company’s shares from the seller to the buyer in exchange for monetary or non-monetary consideration. In most cases, the main part of the sales process is completed at this point. However, the representations and warranties given by the seller will continue to apply for some time, often for many years, which can delay the after-sales process in the case of a negative scenario.

Sometimes a step-wise divestment is applied to sell the company, including an instalment-based payment for the shares. This ensures that the new owner can gradually take over all the necessary know-how from the previous owner. Payment in instalments can also mitigate the price gap in a situation where the company’s value is significantly dependent on future financial performance or, for example, the completion of outstanding orders and contracts. Post-sales stages of the transaction also require constant attention to ensure the successful transfer of the company and full receipt of payments.

An important question: with or without an adviser?

For a cost-conscious business owner, engaging an experienced adviser may seem like an excessive luxury; in some cases, an adviser is not involved until agreements with the buyer are about to be entered into. For smaller companies, the resulting losses may even be reasonable. However, already in case of a medium-sized company, not involving an adviser, or involving one at a late stage, may significantly affect both the transaction price and the success of the entire process.

An experienced adviser can help prepare the company for the transaction, recommend the appropriate transaction structure, identify potential buyers, assist in presenting the company properly by highlighting the hidden strengths, and advise on the negotiation process. Also, when selling a smaller company, it is worthwhile considering the involvement of an adviser – ascertaining the pros and cons and then deciding. In case of medium-sized companies, we strongly recommend involving an adviser.

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