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Selling a company when the owner plans to retire or change their business life requires proper and detailed preparation. The better the company is prepared for the sales process, the better the end result will be for the owner or owners. It is worth preparing well for such a process, especially since a business is often sold once in a lifetime.
M&A - private transaction market
The Polish market of the largest mergers and acquisitions (M&A) is about 230 transactions closed in 2020. These are only large and medium-sized M&A transactions monitored by advisors and entities analyzing the M&A market, such as Mergermarket or Pitchbook. They include both transactions carried out by companies and those carried out by private equity (PE) funds.
In addition to classic M&A transactions in Poland, the area of start-up investments and the development of venture capital (VC) funds is booming. Data published by PFR Ventures shows that in 2020, 153 VC funds financed 300 companies and the VC funds themselves raised over 2.1 billion PLN from investors.
A relatively new way of raising private capital from investors for various projects is crowdfunding, i.e. financing by individuals in a collective but non-public form of projects worth up to EUR 1 million. In this formula, in 2020, 50 projects were financed, raising a total of PLN 77 million.
In addition to the monitored part of the market, there is a large market for buying and selling companies in the SME sector, financing small projects that are carried out daily in free trade through bilateral transactions, often advertised on online portals, which have gained interest especially after the COVID-19 experience.
Company for sale and legal form
Although it is possible to sell a company as a sole trader, civil partnership or partnership, in practice it is by far the easiest to sell shares in a corporation.
For small companies, it is definitely best to transform into a limited liability company, for larger ones it is worth considering a joint-stock company. It is worth thinking about transformation earlier, so as to show the longest possible history of the company.
It is also easier to find buyers for corporations among financial investors such as venture capital and private equity funds. Funds almost exclusively purchase stocks or shares in corporations.
Financial situation, market environment and development prospects of the company being sold
The first thing investors usually ask about is the financial statements. It is beneficial if the financial statements present the financial and asset situation of the company in a reliable and clear manner. Financial statements should be complete and prepared in accordance with the company's accounting policy and legal regulations. Any deviations from market standards or errors in financial statements are poorly perceived by investors and consequently reduce the level of trust and valuation of the company.
When it comes to financial data, investors will focus mainly on a company's revenue, profitability and financing structure. Investors prefer companies with growing sales and increasing profitability. Investors also look at how a company's performance compares to similar companies in the same sector. The better the company's performance is compared to its competitors, the more attractive it is for investors.
For potential buyers, it is also important to know how the company finances its operations and growth and whether the structure of debt and assets suits the company's needs. Buyers will look at the extent to which external capital (loans, bonds, leasing) is used and whether it is used effectively. It should be remembered that the market valuation of a company is always adjusted for the level of debt, which will have a significant impact on the valuation of highly indebted companies.
Another element affecting the valuation is the assets of the company. Real estate as well as movable property will be evaluated and valued by investors. Investors are reluctant to pay for assets that are not business-related and do not serve to generate money. Intellectual property is also important, especially if it gives the company a competitive advantage. Acquisitions of companies with unique know-how, technology or brands are common in the M&A market, but it is important to remember that these assets should be adequately protected against sale (protection of intellectual property in the form of patents or trademarks).
Potential buyers also analyze the market environment of the company and its market share. If the buyer is a strategic entity or a competitor from the industry, they will understand the market environment and the specifics of their industry much better. In the case of financial investors or those unrelated to the industry, they will want to learn more about the market environment, prospects and competition.
In addition to the market specifics, the market position of the company is also important for investors. Usually, the greater the market share, the more attractive the company is to buyers, although investors also appreciate companies that operate in niche or completely new market segments.
In summary, before selling a company, it is worth ensuring the quality and timeliness of financial statements and the results achieved. In addition, it is worth optimizing the financing structure and separating any assets not related to direct operations. At the same time, it is worth describing the market environment well, highlighting competitive advantages and market position. It is also worth focusing on the possibilities for further business development and the prospects for the industry and the company being sold.
Team and competencies
When selling a company, you have to prepare for the buyer's continuation of the business. The most important element of success in the company purchase process is the acquisition and retention of key managers and employees. In the case of large companies, the owner usually prepares to hand over management beforehand, for example by moving to the supervisory board. In the case of small and medium-sized companies, the buyer often takes over the team of employees, taking into account that he will be involved in the management of the purchased company after the purchase or will hire his own person to manage it. Unfortunately, employees and management are often afraid of the process of change of ownership and can use this time to change employers. When taking over a company, it is therefore worth making sure that the key people and competencies remain in the company from the point of view of the continuation and further development of the business.
Preparation of information and documents for investors
A professional company sales process should be based on documents that present the company clearly and transparently as a company ready for sale. Such documents will facilitate the process of finding an investor and reaching those most interested. Often, based on such documents, investors submit initial offers to purchase a company, which are clarified after the due diligence process, i.e. a detailed examination of the company put up for sale.
Care should be taken to prepare transparent and aesthetic information documents, such as:
- An information document (teaser) is a document that contains basic information about a company, in particular registration and contact details, information about the company's business activity, organizational and ownership structure, basic financial figures and forecasts, and key information about the market in which the company operates. The information teaser is usually a one-pager and is the first document that potential investors receive. Its purpose is to make investors interested in investing in the company.
- The information memorandum (Info Memo) is a more detailed version of the teaser and should include a more in-depth description of the company and its activities, history, detailed financial data and forecasts, and market analysis. It should be a document that enables potential buyers to make an initial valuation of the company.
- The pitch deck is a document that contains information from the information memorandum, but in the form of a presentation. It is a document that should be used by the entrepreneur to personally present the company during meetings with potential investors.
NDA - Non-Disclosure Agreement
During the initial talks with an investor, the question of whether the seller will disclose sensitive information is always a concern. It is difficult for entrepreneurs to agree to disclose internal company documents before they are convinced that the investor is serious about acquiring shares. Particular caution should be exercised when the investor is a company from the same industry or a direct competitor.
A standard solution in such a process is a confidentiality agreement (NDA). However, it sometimes happens that the parties get so involved in the NDA negotiations that they forget about the basic purpose of the process that the agreement is supposed to serve.
In such a situation, it is worth dividing the whole process into several stages, during which certain batches of documents will be gradually made available, starting with the least sensitive ones, enabling the submission of an initial purchase offer. The most sensitive information - commercial contracts or production technology - is data that should be disclosed at the last stage of the transaction and should confirm the accuracy of the previously provided information.
Due diligence, i.e. checking the company before purchase
Investors interested in acquiring a company will certainly verify the company's key documents as part of a process called due diligence. An unprofessional approach and the company's lack of preparation for this process can lead to the failure of the entire venture, extend the sales process or affect the attractiveness of the purchase offers made.
Usually, the due diligence process takes place in a virtual data room such as the Virtual Data Room SECUDO (more at www.dealdone.pl), which allows for proper preparation of documentation for buyers, appropriate confidentiality of the process and information provided, and communication with one or more buyers in a confidential and secure manner.
The due diligence process using SECUDO VDR has been described in detail in a separate blog post: https://www.dealdone.pl/post/proces-due-diligence-z-wykorzystaniem-virtual-data-room.
When selling a company to a competitor, it is worth considering conducting a so-called Vendor Due Diligence (VDD), which allows you to provide key information necessary for valuation and submitting a purchase offer, without sharing sensitive information that constitutes a competitive advantage and company secrets. We have written more about VDD in a separate blog post: https://www.dealdone.pl/post/vendor-due-diligence-vdd-przygotuj-się-profesjonalnie-do-sprzedaży-firmy-w-vdr.
Company valuation
When deciding to sell, every owner asks themselves the question - how much is my company worth? Selling a company is usually a unique and often one-off event in the owner's life. It is therefore worth having a verified view of the valuation and potential value of the sale transaction. Even if the owner has an idea of the value of their company, it is worth seeking an objective opinion from an external expert. The process of an independent valuation itself will allow the owner to better prepare for the sales process and discussions with investors. It will also be a source of valuable information for the entrepreneur and may additionally add credibility to the company in the eyes of investors.
The valuation method should be tailored to the specifics of the company's operations, and the assumptions made for the valuation should be consistent and credible with the management's position. It is advisable that the valuation of the company be carried out using at least two methods, e.g. asset-based, income-based or comparative.
Term sheet
After reading the information memorandum or after a preliminary examination of the company, the investor should present a term sheet, which is a kind of preliminary investment offer containing the key parameters of the future transaction and sales agreement. The term sheet is a reference point for the preparation of the investment agreement. Agreeing on a term sheet at an early stage of the transaction allows both parties to see whether their mutual understanding of the terms of the transaction does not differ too much. This can save a lot of time and difficult negotiations. The term sheet is agreed at a stage in the process where the investor has received the most important, but not necessarily the most sensitive, information about the company. This protects the seller from disclosing confidential information too early.
SPA or sales-purchase agreement
The process of negotiating and developing the final content of the company's sales-purchase agreement (SPA) is undoubtedly the most difficult stage of the process. This is especially true if the other party is an experienced fund or an experienced large company from the industry.
For an entrepreneur, especially one selling a company for the first time, it can be impossible to draw up a final contract without professional legal and/or transactional advice.
The draft sale and purchase agreement usually contains a number of different clauses protecting the investor and breach conditions, in which the investor can limit payments for the acquired company or make a claim against the owner. Such a contract often specifies the conditions for further cooperation if the owner undertakes to continue to support the management of the company during the transition period. At this stage, the seller should also protect his interests and minimize the risks after the sale of the company.
It is worth carefully analyzing the proposed provisions of the SPA agreement and taking advantage of the experience of advisors who have negotiated such agreements in similar transactions.
About us
PlatformaInwestora.pl is a website that brings together users with interesting business and capital offers and investors looking for ways to invest their funds. Our website helps to raise capital, find a partner, finance start-ups, sell shares or entire companies, and presents interesting forms of investment. The portal reaches a wide range of investors, both Polish and foreign, and the number of industry offers puts it at the forefront of capital investment services. Our employees actively help to edit investment advertisements because the mission of the PlatformaInwestora.pl website is to realize the business goals of our clients and to help them conclude as many business transactions as possible through us.
author: Bartłomiej Dmitruk
