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Company sales are often compared with real estate sales. There may be similarities, but even a layman can tell you that every property is different from another. However, there is one thing that real estate is certainly not: a living object.
The sale of a company, which is quite a living object, is therefore much more comparable to an surgery in which organs are replaced. With a vested interest in ensuring that the patient not only survives, but thrives.
Like many comparisons, this one falls short, but it illustrates that selling a company,
whether in the SME sector or still at the start-up stage, is a process that requires a great deal of attention and an eye for detail. And it is also not entirely wrong to see a consultant in a company sale as a practitioner who works to a large extent via communication.
It would be tempting to associate a medium-sized company with an adult and a startup with a teenager, but here we reach the outer limits of our analogy, since both startups and medium-sized companies are often similarly complex and sometimes fragile organizations.
The most important differences lie on two levels
In terms of organization startups are expected to experience the most dynamic growth phase in the rather near future. Which influences company valuation. This explains why small organizations can sometimes achieve very high company valuations.
Medium-sized companies, on the other hand, have to be measured to a greater extent by what has been achieved in the past.
The longer the history, the more likely it appears that future development will also take place within a historical range. Therefor company valuation is based on current or immediate future parameters.
Next, owners of SMEs and startup founders deal with transactions differently for a number of reasons. Transaction and organization are often equally important to the SME entrepreneur. Whereas in the case of a startup, a significant personnel organization does not necessarily exist and/or all parties involved worked towards a company sale from the outset.
All things considered, the process of selling a company differs less from "startup" to "medium-sized company", but from company to company, each being unique on many more grounds than just company stage.
Are you a shareholder in a medium-sized company or start-up and would like to get a second opinion on your transaction project?
What are the factors that tend to hinder a company acquisition or, conversely, promote it?
Company Stage
This point is the most important and here “phase” does not refer to the startup vs. medium-sized company stage, but rather the simple aspect of whether a company is currently thriving or on the downhil side. If your company is currently confronted with declining sales or profits, a potential investor will always consider whether he may not “grab the falling knife”. A transaction is then not necessarily impossible, depending on sales and profit levels, but the circle of potential buyers/investors is noticeably smaller, business model, customer relationships and market are due to be scrutinized in even greater detail than normally and the sale in such a phase will certainly have an impact on the company valuation.
As much as a sales oriented consultant may regret stating this, but in such a phase anyone is well advised to wait another two years until the tide has turned again.
It will take every SME that long to develop a new course and see it bear fruit.
But this also means: think strategically. The German corporate landscape is facing a wave of company successions (although these demographic trends are visible throughout the western world). I am not the one to assess how supply and demand in the M&A market develop over the next few years. Let alone long-term macroeconomic factors. However, if the company you hold is currently doing well and you are considering a sale in a 5-7 year timeframe anyway, then perhaps today is a good time to take the first steps in that direction
It is also interesting to assess the sales prospects of a start-up stage company, whose sales/profits are currently moving sideways or declining.
Start-up financings and exits are trend-driven. The trend can flatten out and exit candidates, of which there may have been few in the first place, already made their strategic acquisitions. In such case, the cash flow situation will determine the next step. Does the company have the potential to generate sustainable profits? Depending on profits, a resale to another financial investor (“secondary”) or the repurchase of shares by the founders, albeit at a modest valuation, may be an option.
If not, an asset deal is probably on the agenda, which can make sense for a start-up if you think beyond the usual tangible assets.
Or, and this is even harder to observe from the outside, the founders/management team consider a "pivot", i.e. an alteration of the business model on to a completely new approach. This in turn may or may not be supported by the existing investors.
At first glance it looks as if there were significantly more variables at play here than with a medium-sized company. Ultimately, however, everything revolves around the profit situation, reserves, willingness to use them if necessary and the market.
However, start-ups and their shareholders operate in a different risk scenario from the outset and are more opportunistic in that cuting losses and moving on to another project can seem more reasonable than entering an even more unpredictable situation. The commitment to the company is therefore different.
This in turn results in a much more sober behavior in the event of a prolonged crisis.
Are you a shareholder or managing director of a company in the D-A-CH region and would like to better assess the transaction prospects, from financing to exit?
Unity amongst shareholders
Based on my previous experience, three shareholders rarely agree, but there should hopefully always be agreement on the basics. Not only with regards to a transaction, but also with respect to operational issues. The potential buyer will have a keen interest in talking to the shareholders at an early stage and certainly picks up on any dissonances quickly. There are usually factual (and emotional) reasons for differences of opinion. If you are not in agreement about a potential transaction, consulting a third party, whether a knowledgeable friend or an advisor, may help to better assess the situation.
Degree of organization
While it is often said in other contexts that hierarchies are not productive, in the case of company acquisitions one should avoid the impression that too many processes depend on one person or that too much operational know-how is concentrated in one head alone.
A second management level is already of value from the point at which the accumulation of operational work prevents shareholders or upper management from thinking and acting strategically. Just as the search for and induction of employees requires time, the same applies to setting up structures that allow for some delegation. Even if a company sale is a lengthy endeavor (more on this below), it will not be possible to work on the organization in paralell. Thus organizational aspects should definitely be considered before any transaction.
Company- & Holding Structures
A distinction needs to be made at this point. Holding structures, such as a simple UG or GmbH, through which shareholders indirectly participate in companies to be sold, must have been established several years in advance of a transaction to produce any tax advantages for the shareholder (taking about German legal entities), but are ultimately irrelevant from a buyer perspective. The transaction proceeds are simply paid out to the UG or GmbH, instead of the personal shareholder.
In contrast all types of parent- and sub-companies that shall be sold - and in particular their number - are rather significant. For the simple reason that all these organizations, namely the rights and obligations entailed, must be audited. This can be avoided by means of an asset deal, but then the question arises, among others, as to whether all assets necessary for operations have really been sold.
This fits in with a basic rule for company sales. Complexity is almost always negative. Keep it simple. If the advantages of complex corporate structures are not significant and sustainable, they should be avoided if possible so as not to jeopardize any subsequent company sale. Significant, as usually only a certain volume of business compensates for the disadvantages of additional administration. And sustainable, as this advantage should prevail in the foreseeable future.
If certain structures, production or sales subsidiaries abroad being entirely valid examples, cannot be avoided, one should keep in mind that company sales and other transactions (such as equity financing events) will certainly be protracted.
What goes without saying
In German, we speak, with good reason, of secondary and primary virtues. Transactions are a case where order becomes a primary virtue. Some entrepreneurs might assume that basic documents, in the most simple example annual financial statements for the past X years, must only be available upon due diligence. Digital companies may have relationships with service providers that are important to them. There should also already be a reporting system that can be accessed. Otherwise, the project will come to a standstill in the earliest phase – drafting the presentation of the company and pully together financial data. This is all the more true for a later due diligence.
Every consultant will gain an overview of these requirements in the initial discussions and – if both parties decide to work together – deal with them. From this point onwards, it is important to structure the company sales process in such a way that the probability of a satisfactory transaction for the shareholders and the company is increased.
Now there is a lot of talk about the “art of dealmaking”. For these purposes, however, it is more expedient to refer to the process elements of a company sale, i.e. all the technical foundations, if you like, that should be created before something like art can even come about.
This includes
Project start and analysis
In a first step, the consultant will gather all documents that contribute to an understanding of the company. This includes above-mentioned annual financial statements and annual reports as well as any reporting from external service providers (e.g. online marketing agencies), additional information from the client on their value chain from supply chain to sales and any already available data on market and competition. Which is only the foundation of a proper investment case whith data being challenged and trends taken into account.
Documentation
All of the above information is compiled in several documents. This can include a separate financial plan, but in any case an investor presentation, sometimes also called an “investment memorandum”, which in turn can be designed in different detail for different target groups and purposes.
Approaching buyers
The buyer approach is based on exchanges with the company about the market environment and and obviously suitable candidates. Also, interesting companies have often already been approached proactively. In addition, the consultant will usually look at the market based on his previous experience in this sector and check on recent transactions.
How these buyers are approached in detail differs from consultant to consultant. The purpose of initial discussions between advisor and buyer is, of course, to arouse interest and perhaps also to explore basic parameters of a possible transaction. The success of this part of the process is, among others, based on aforementioned documentation. Without proper investment case, no investment, or even feedback.
Presentations and negotiations
How the next steps are carried out depends on the team of the company advised as much as on how the buyer conducts the discussions. An intensive, direct exchange involving the most important decision-makers makes sense if certain key parameters have already been touched upon or to discuss market and sales issues.
It is advisable to focus on "deal breakers" and red flags" at first, making sure that no time is wasted. However, the personal chemistry between the parties cooperating after the transaction cannot be considered important enough, so in this project phase a balance between friendly discussions, requiring a lot of resources, and making progress on factual issues, needs to be found.
Needless to mention, in an insolvency or bidding process context, processes would be amended (but not turned upside down either).
Presentations and initial negotiations ultimately lead to the conclusion of a (mutual) preliminary agreement (LOI) or a buying offer.
It should be noted that LOIs are not binding. So please reflect upon your negotiating partner and assess how binding you consider the LOI to be. Whether and to what extent the LOI partner adheres to the preliminary agreement is decisive for the success of the entire transaction endeavor, not just with this partner.
The potential buyer will regularly require exclusivity before investing any resources in the due diligence of the company. The exclusivity may take various shapes and forms but in no case can the exchange with other potential investors be continued in the same way as before.
Due diligence
In a due diligence (DD), every stone is turned upside down. Professional buyers always commission their own management consultants who specialize in certain areas, such as an examination of the market and the business model as part of “commercial due diligence” or the review of annual financial statements and related documents in the context of a “financial due diligence”.
At the same time, due diligence is rarely equally comprehensive, which is partly due to the investor's in-house expertise. For instance, a private equity investor who already owns portfolio companies in this segment, will usually assume that his expertise exceeds that of one or other management consultancy.
It can be assumed (but should be confirmed in writing anyway) that the buyer bears the corresponding costs.
This in turn gives rise to his need for the temporary exclusivity mentioned above. If the seller changes his mind and strikes a deal with another party, the buyer would have literally sunk any costs incurred thus far. Which should be avoided.
A more detailed description of the DD process is not necessary here, keeping in mind that questions are regularly answered in blocks, which takes its own time in addition to the provision of the documents requested. Nevertheless the process usually leaves some room for buyers and sellers to discuss the sales and purchase agreement (SPA). This is often done in parallel in order to complete the entire process within a reasonable time frame.
Signing and closing
Signing” refers to the signing of the contract with which the parties commit to a legal transaction, while “closing” relates to the fulfillment of the associated obligations. Of particular interest to the buyer is the payment of the purchase price or the first installment, if installment payments have been agreed upon.
In any case, these events are certaibly milestones in the transaction, but do not necessarily end the process begun between buyer and seller. As a rule, the agreement will be that both parties continue to cooperate for a certain period of time in order to achieve contractually agreed objectives.
