A brief guide on how to successfully sell a business or business unit.
Selling a company is not easy …
To understand how to sell a company (technically a sale of a company or branch of a company) it is important to understand that it is a complex and articulated process, where the multiplicity of situations does not allow to identification conduct and absolute rules.
However, it is possible to trace the essential aspects of the company sale to successfully negotiate a sale transaction. Let’s see what they are.
Company acquisition and sale criteria
First of all, to conclude a successful business sale, it is appropriate to establish the acquisition criteria, to find a balance between the opposite needs:
– that of the seller to obtain the best possible price and to reduce the guarantees to be offered to the buyer regarding the assets and liabilities of the company;
– that of the buyer to carefully check what he buys, to avoid the risk of paying too high a price, and to evaluate the actual achievement of the economic and financial objectives that the company will be able to generate.
One of the elements that characterize a company transfer transaction is the need to maintain the greatest possible confidentiality at every stage of the process until the conclusion of the negotiations.
Confidentiality is necessary both towards the market and competitors and towards the internal staff of the company.
It will be necessary to sign a confidentiality agreement with those who express an interest in deepening the operation, which has the function of revealing the information necessary for the evaluation of the company, of showing the progress of the negotiation, and of providing a formal framework. to the operation, obliging any purchaser not to disclose the acquired data relating to the company.
With the confidentiality agreement, the buyer undertakes to use the information received solely for the purpose of evaluating the company, extending this obligation to the people involved in the evaluation process: managers, employees or external consultants, etc.
Plan the timing of the operation
Another important aspect is to plan the timing of the operation. In fact, many months often pass from the moment in which the idea of selling the company matures to the final moment in which the operation ends with the signing of the contract.
In this interval, many changes and unforeseen events can occur that modify the structure and conditions of the initial project, or even compromise its feasibility.
To respond to these uncertainties, it is necessary to plan each phase and timeframe for the completion of the sale negotiations.
Therefore, when you want to sell a company or a business branch, you must first define:
– the methods for identifying buyers, the criteria for approaching and managing relationships;
– the company valuation criteria and the sale price;
– the information memorandum containing a brief profile of the company detailing the summary information relating to the sector in which the company operates, to the activity carried out by it, to competitors, to the main financial data;
– the preparation of a business plan must contain, among other things, the prospective valuations of the company in the future 3 / years, the peculiar characteristics of the business, its profitability, and the ability to generate adequate cash flows.
Letter of Intent
The other crucial step is the signing of the letter of intent, through which the parties set the general terms of the transaction.
The letter of intent most often represents a sort of vademecum of the main points of the negotiation that will be scrupulously regulated in the subsequent preliminary sale contract.
The letter of intent may or may not be binding depending on the case.
We say, in general, that the letter of intent is binding if it concerns the following aspects:
– the obligation of confidential treatment of company data;
– the exclusivity obligation, when the seller undertakes not to conduct other negotiations for a defined period of time;
– the seller’s obligation not to carry out extraordinary operations in the company;
– the timing of the conclusion of the negotiation.
The letter of intent usually contains:
– the estimation method used to define the company’s price;
– the purchase price (usually linked to the outcome of the due diligence);
– the methods of payment, identification, and release of guarantees;
– the future management and governance criteria of the company;
– the times to conclude the negotiation.
By means of the letter of intent, the parties agree on the times and methods for carrying out the due diligence. This is the investigation activity aimed at collecting and verifying the information necessary to evaluate the company (business plan, financial, accounting, legal, market, environmental, etc.).
The due diligence is aimed at understanding whether what the buyer is buying actually meets their expectations.
Secondly, due diligence makes it possible to assess whether the price offered is the one found during the surveys carried out and if the company’s development prospects are reliable and compliant with the business plan.
A practical alternative to due diligence is to transfer the management of all or part of the company (branch) for a certain period of time while maintaining ownership. In these cases, we speak of company lease and can represent an intermediate step useful to confirm the subsequent definitive sale.
The preliminary business sale contract
Following the due diligence, the parties will negotiate the preliminary sale contract.
Contractors are generally induced to sign a preliminary contract first and then the definitive transfer contract, for various reasons:
1. for fear that one of the parties will change his mind and evade the stipulation;
2. to allow the buyer to obtain the sum of money when the price is paid upon signing the final contract;
3. to allow the purchaser to accrue the administrative requirements for registration in the various registers;
4. to postpone the payment of transfer taxes;
5. to ascertain some element, data, etc.
In most cases, the preliminary transfer agreement establishes:
– the structure of the transaction;
– the conditions, times, and methods of payment;
– the assets and liabilities to be transferred;
– the seller’s obligation not to carry out extraordinary transactions;
– the conditions precedent and termination of the contract;
– buy / sell options (put option and call option);
– the guarantees and the operating rules of the guarantees;
– the seller’s non-compete obligation;
– the shareholders’ agreements, which contain the management rules if the seller will continue to have a role within the company;
– deadline for signing the definitive transfer contract before the notary.
Once the preliminary transfer contract has been signed, within the established term, the parties will stipulate the definitive contract before the notary (usually chosen by the purchaser).