When I talk about how to sell a company, I mean the transfer of an ownership interest in a company from its current owners to a new owner(s). The “asset” being sold does not necessarily have to be only a 100% interest in the company in the form of a transfer of the business interest or all of the company’s shares to the buyer.
There are several ways in which a company can be sold . However, at the very beginning of the entire acquisition process (sales process), the question is not how to sell a company, but why to sell it, what should precede the sale, and how we can ensure that the sale will really be “brutal” and that you will be satisfied.
So let us start with the first point – what are the reasons for selling a company.
The most common reasons for selling a company are:
- generational change (replacement of the current generation managing the company with family successors) or leaving the company for “retirement” and transferring it to pre-selected management
- any personal reasons of the owner (both positive and negative, often including a change in life circumstances as a result of burnout or divorce. Or, conversely, cases where the seller has a better business, and this current one no longer fulfills them and they cannot or do not want to move it forward)
- the company’s liquidity – the company is at the peak of its success or is heading toward it, or the company has nowhere to grow and needs to be reorganized (meaning: handed over to other hands that will manage it better and lead it forward)
- the desire to become part of a larger national or international group
- the need to make room for other associates with their own separate company (spin-off)
Your personal reason is important because it also demonstrates the reality of your decision to sell the company and let it go on to live its own life. I deliberately do not mention an investor entering as a reason for selling the company or part of it here; for this topic, see the article How to Bring an Investor into a Company and Expand It.
The reason for the sale is always complemented by the sale objective and by your genuine decision to sell (Your internal decision to sell the company must not merely be hypothetical; you must be determined to let it pass into foreign hands).
The objectives of company owners when selling generally include:
- what will I get out of it when, as the owner, I sell my company or my ownership interest in it (I can already hear you saying, money, obviously) and at the same time / or
- smoothly transfer your business into new hands (whether within the family or to a new owner – and again I emphasize, you must be prepared to let “your child go out into the world and live its own life”)
- the growth of the company that otherwise could not occur (for financial, capacity-related, or other reasons), and the growth of the part of the company that, as a result of being separated, has better conditions for its own development – especially in the case of so-called spin-offs).
And now that I know my reason, my objective, and I have decided to go through with it, can I proceed?
Preparing a Company for Sale
I will answer that with a story:
“I want to sell the company really well.” That is how a client greeted me at our first meeting. And I smiled and said to him: all right, but is the company prepared for that?
What do you mean? he asked me. I have made up my mind, so let’s do it; the company has good figures, and I already know who to sell it to.
And so I began:
- You own it as an individual, and the tax and social contribution burden is almost 40% of the purchase price
- Do you have clarity about what the main asset of your company is, and why would anyone want to buy it? (One of the key ones – he owned the technology as an individual… of course)
- The company’s valuation is not the same as the purchase price. How did you arrive at the purchase price and establish its realism?
- Don’t the key customer contracts happen to contain a change-of-control clause? And what about debt financing and cases of acceleration; where do we stand if the structure changes?
- There are more points, but I would rather not write them here; I would be happy to discuss them with you ( schedule a consultation)
And that is how the thinking began.
Cleaning up.
Preparing the company for sale.
If you want to sell a company well, it is not enough just to see the amount at the end of the tunnel (when the transaction is closed).
If we also want to work our way towards a good price while minimising the scope of liability in the form of representations and warranties regarding the condition of the “transferred” asset, or indemnity commitments and other punitive mechanisms running through the entire transactional legal documentation (in other words, the paperwork you sign for the whole transfer to take place), you must necessarily first take step A. prepare yourself and your company for sale and step B. then get down to it (enter into negotiations, go through the stages of the company acquisition and sale process)
Many seemingly complicated matters can be resolved before you even let the buyer access your documents as part of due diligence (legal review). However, you need to prepare for this.
How to prepare a company for sale
… and in practice, not only the company but also its owners. As with everything being sold, the rule applies: you must know what you are selling, and you must know what you are buying. If you are cautious, you know that determining the actual condition of your company, its true value, and the potential of its main asset (the target = the reason) for which the buyer would purchase your company is essential.
The seller’s position and the buyer’s position are clear:
In every transaction, the seller tries to sell at the highest possible price, with the fewest possible liability mechanisms, particularly those relating to the condition of what is being transferred and punitive mechanisms.
Ideally, the seller wants the purchase price immediately, or possibly a form of earn-out (for mechanisms for paying the purchase price, see the article Company value, purchase price and methods of its payment in a company sale).
The buyer on the other hand, quite logically, pushes the purchase price down (including on the basis of the buyer’s findings during the legal review) and seeks the broadest possible catalogue of the seller’s representations and warranties, punitive and liability mechanisms, indemnity commitments, and ideally seeks to link payment of the purchase price, or tranche it, over longer periods after the transaction is closed.
When, as the seller, I want the buyer to have as little opportunity as possible during negotiations to reduce the purchase price and increase the scope of my (the seller’s) liability, I logically need to know the legal, tax and accounting—or, in other words, factual—condition of my company.
What generates cash flow?
The overwhelming majority of company sales are not carried out because of attractive share capital (just kidding).
Generally, the real target is the assets of that company —a building, business centre, IT technology (software), office centre, app, patented product—simply something that generates revenue for the company. The target may just as easily be the acquisition of key customers or an employee base.
The target (target) is then transferred on the basis of further factors—is the company itself problematic? Is a share or asset transfer, a transformation of the company, a transfer of the business, or another combination of restructuring the company’s structure more suitable?
Assessing the risks and potential costs that may arise in the event of problems, as well as the costs inherent in the company and above-standard costs (e.g. management golden parachutes and longer notice periods), are factors that the buyer naturally considers. So it is about revenue, but also about what reduces it.
Who owns the target asset?
Separating the assets that you want to transfer as part of the sale to the buyer together with the company from the assets that are to remain yours —for assets that you want to transfer, you need to be sure whether the given asset really belongs to the company, or whether I developed it at the very beginning of our company’s existence and actually own it as an individual, or whether someone else owns it due to inadequate copyright arrangements.
Are all intellectual property rights, technologies, software, apps, e-shop, domains, trademarks, utility models, patents (and more) really owned by the party that should own them—that is, by the company—or do I own them as an individual, with the transaction also reflecting this situation?
As for assets that are to remain yours—the separation is necessary either because you intend to continue doing business with them in another field and they are unrelated to the transferred “part”, or because you have them (God forbid—nothing like that ever happens) for private purposes.
What do I not want to sell together with the company?
You know the situation: a jacuzzi owned by the company, the wife’s car or the son’s computer, some expense somewhere but nobody can find the invoice, another employee golden parachute at ABC, not to mention change of control provisions in key client contracts and, continuing on, the possibility of accelerating the maturity of the company’s existing loan obligations if the bank or relevant creditor does not consent to a change in the structure under the loan documentation (and I could go on)
How do I sell the target company, the target assets?
Determining the most suitable form of sale of the transaction – I deliberately speak about the objective of the transaction, because it may be carried out as share deal (transfer of shares/equity interests), asset deal (sale of selected assets, so-called cherry-picking, transfer of a business, transfer of part of a business), but also by way of a transformation of a company, such as the demerger of part of a company and its merger with another company.
I am the seller – what will this transfer cost me?
You may say – what a silly question. After all, I am receiving money. Well, the old familiar certainties have not disappeared here either – taxes and social security contributions.
It is necessary to consider the tax and social security burden on the purchase price upon sale – you are the seller, and therefore the tax and social security burden logically falls on you – as you surely know, the tax and social security burden on the sale of an equity interest differs from that applicable to selected asset deals, and this topic is often crucial when structuring a transaction for tax and legal purposes (in simple terms, determining how the transferred asset will be transferred and with what tax and social security burden). Rather than looking for solutions during the transaction, it is better to think in advance about the fact that you will eventually sell the company. I do not recommend hastily devised and opaque solutions to anyone.
What am I liable for after the sale, and for how long?
As the seller, you should try, as part of the negotiations, to reduce the scope of your liability (typically your representations and warranties) for the condition of the target company, especially your liability after completion of the sale.
Your objective is surely not to sell the company for EUR X and “guarantee” up to X + EUR 1 million. As for the time aspect of liability – the seller seeks to minimize it, while the buyer naturally seeks to maximize it – at least for the duration of the applicable limitation periods (which, of course, are measured in years).
What will the buyer be looking for in my “papers”?
Everything that could come back to bite the buyer, as well as everything they can use to push the purchase price down and increase the scope of liability.
Important aspects for the future operation of the company, from a business perspective – revenues, liability for the company’s obligations, as well as the running of the company – employee costs, disputes, ownership of the target assets. Factors include, for example: do the company’s loans become due if its ownership structure changes? Could a key customer leave when the company’s owner changes? Could retail tenants terminate their leases if I sell the business center to a third party, and if so, under which form of sale? Who owns the software source code, and will it remain in the target company?
Without answers to these questions (and not only these), the sale itself will not proceed easily. Just as a surgeon will not operate on your knee without an X-ray, a buyer will not want to buy something about whose condition they know nothing or very little.
Whether we are acting for the buyer, seller or investor, we always ensure that the company’s actual condition is properly examined (the client simply must know what they are selling and, conversely, what they definitely are not, as well as what they are buying, what they are entering into, and what they are liable for upon sale).
What are the steps involved in selling a company?
Once you know the company’s condition, have resolved the issue of its tax and social security burden, and have a buyer, you need to know the steps that lie ahead. Each transaction is unique and specific, varying from company to company, from the type of transaction to the type of expansion.
However, they all have more or less the same structure, and the basic rationale of each transaction remains the same – we have taken you through some of the steps earlier in this article:
- first, we looked at the TARGET – the valuable asset that the buyer wants to acquire and the investor wants to invest in (this may be software, a factory, the company as a whole, specific know-how, a customer base or your employees) – in short, the reason why the transaction will actually take place
- then we looked at the structure – not every company owner wants to hand over the company itself when an investor enters or when it is sold, so some form of carve-out, spin-off or other corporate structuring often comes into consideration (you transfer some things, retain others and continue doing business with them, or use combinations)
- Vendor’s due diligence (review of the company by its owners) – closely connected with the points above
- tax structuring – where the purchase price concerns the transfer of an ownership interest, each transferor considers their options, especially how to legally achieve lower tax rates. However, one must remain legal and use common sense – you cannot perform sleight of hand at the last minute, otherwise you will, at best, face additional taxation; therefore, it is ideal to address the structuring earlier rather than only upon the sale
- if an investor is entering – how (and whether at all) to incorporate them into the company’s direct structure, and which instruments to use to introduce investor capital into the company (bonds, convertible loans, assessing what might be suitable for us here)
Once we have completed the steps mentioned above, further procedures follow, in which the buyer’s side enters the process.
The company sale process
… or what awaits you in negotiations and during the company sale process.
As I mentioned, every transaction is unique, but in principle the sequence of steps can be standardized. This is partly because legal regulations governing company transfers are in force in Slovakia, meaning that some steps simply cannot be skipped, and secondly because over 25 years an environment dealing with the sale and purchase of companies, selected assets, business transfers, etc. has developed in Slovakia. I dare say that the vast majority of entrepreneurs are no longer surprised that a due diligence review is carried out before the documentation is signed, or that before the transfer the seller may request a notarial escrow, while the buyer may request warranties and representations regarding the subject of the transfer.
We are at the stage where we have prepared the company for sale and are entering negotiations with a potential buyer. What generally awaits us:
Pre-acquisition and acquisition phase (of the company sale)
Negotiations, negotiations, negotiations.
On the preliminary commercial terms and the wording of the NDA (confidentiality agreement), through drafting a Term Sheet (generally as non-binding as possible), a Letter of Intent / Memorandum of Understanding.
The parties thus “declare” to each other a certain form of interest in proceeding with the sale–purchase, subject to further negotiations, commercial agreements, completion of due diligence, fulfillment of regulatory obligations and signing the documentation in the agreed wording.
- An absolute must that the seller will go through on the buyer’s side is due diligence (review), this time for the buyer’s purposes – they generally conduct legal, as well as tax, financial, technological and environmental due diligence, taking into account the objective of the transfer.
We grant access to the buyer’s documents only after the confidentiality agreement is signed (NDA), either in the form of a physical data room (they come to our company, we lock them in a room, and there they study the documents they requested as part of the legal due diligence questionnaire and which we are willing to provide), or the same in the form of a VDR (virtual data room).
It is important to bear in mind that we must be careful about what data we share, what we allow the buyer to access, labeling information as sensitive and confidential or as a trade secret, and also about who will gain access to the documents. Many sellers may (justifiably) fear the disclosure of know-how, the terms of key agreements, or breaches of their confidentiality obligations – but they can prepare for all of this in advance.
The result of legal due diligence is usually a due diligence report – a report on the findings of the legal due diligence (it may be comprehensive or focused only on so-called “red flags” – key findings, red flags). Based on these findings, among other things, the buyer formulates requirements regarding the purchase price, its payment, and the scope of warranties and penalties, as already mentioned. Therefore, if you have prepared the company well for sale, you are in a better position.
- A separate chapter concerns setting the purchase price and purchase price payment models. (see: Company value, purchase price and methods of its payment upon the sale of a company)
- A framework acquisition agreement, often called [:SPAs] (SPA), may have various other names, but the objective is the same – to establish a framework for the parties’ rights and obligations so that the transaction can be completed, to set the conditions for proceeding with the transaction ( conditions precedent, so-called [:CPs]: conditions precedent), and the conditions following completion (conditions subsequent).
As a rule, the sale of a company under an SPA is timed as follows (very generally, for the purposes of this article):
- signing (signing)
- satisfaction of the conditions precedent
- completion of the transaction (closing)
- post-closing matters (matters following the transaction).
- Do not forget your obligations towards regulators – the antitrust authority and notification of the concentration are crucial if your acquisition is subject to them, and must be addressed before its implementation. Notifications to the NBS, and cases where you hold specific authorizations and licenses.
- Adjustment of relationships after the buyer acquires the company – should the sellers continue to assist the company after the transaction? Is any cooperation required after completion of the transfer, and if so, for how long?
Basic Company Sale Checklist
If I were to summarize the steps of a model company sale in a CHECKLIST, it would look as follows:
- Tax structure: reviewed and established (ideally not at the last minute and in a legally compliant manner)
- Target company ready for sale: any Vendor’s DD completed, assets to be transferred identified, we know the company valuation, and we are realistic about the purchase price and its parameters
- A genuine desire to sell: yes
- Buyer: we have one
- NDA, Term sheet (LOI, MoU) signed
- Buyer’s Due Diligence: behind us
- Purchase price and payment terms: negotiated
- SPA and technical documents prepared, concentration notifications ready, we know whether we as sellers will assist the buyers after the transfer, and the non-compete agreement has been settled
- Signing (signing of the transaction documentation): scheduled; conditions precedent to completion of the transaction: known and established
- Closing: on track
- Post-closing agenda (such as an agreement on cooperation after the exit): prepared
This article aims to guide you through the company sale process in a simplified yet high-quality manner, regardless of whether you are going through a sale for the first time or the xth time. If you found the information interesting, we are glad. If you would like advice or have any questions, feel free to write/call, or schedule a consultation.
JUDr. Zuzana Skýpalová, Founder & CEO SKYLEX
