The so-called M&A or transaction process for selling a company is often complex and almost always time-consuming. It requires careful planning and the support of a knowledgeable, experienced transaction advisor is essential for business owners. But what should you expect? The experts at Moore Hungary Financial Advisory summarise their practical advice:
Preparing for the time and challenges of the sale of business transaction process
It is common among business owners (and managers) who have never been through a company sale transaction process to expect the process to be completed in a few months. Although this does happen, it is not the norm. A minimum of one year is expected for a sale process, but often more, especially if the company is not otherwise prepared for the process. Furthermore, preparing the company and managing the process requires considerable effort on the part of the business owners, especially if they wish to keep the sale confidential from employees, accountants and other stakeholders whose involvement could facilitate and speed up the process. When selling a business, owners should be prepared for a lot of „homework”.
Procrastination: the biggest enemy of a successful transaction process
Beyond a certain point, the longer an M&A deal drags on, the more likely it is that the deal will not close, or at least that the terms will be less favourable to the seller. It is very important that the seller responds to reasonable questions from the prospective buyer(s) without delay and works smoothly with its advisor and counsel to move the transaction process forward as quickly as possible. It is often a mistake for business owners to put the transaction process behind other tasks or even holidays. But this can be a serious mistake that can negatively affect the success of the sale process.
Preparing and organising your company's records to ensure a successful transaction
Typically, business owners are convinced that „everything is in order” and „everything is available” because the company has been operating for many years and has always successfully passed annual audits and possible NAV audits. However, this is often not the case with a transaction process. For example, one of the most common pitfalls is the lack of valid contracts. There have been many cases where the due diligence data room shows contracts of sale/supply/lease/lease that have expired or have not been signed. Especially in the case of SMEs, given long-standing business relationships and personal trust between business partners, some contracts are not signed by both parties or expired contracts are not formally renewed. Another common case is the lack of analytics to support the accounting statements, such as customer or supplier ageing lists that do not match the relevant general ledger balances. It is therefore advisable to prepare carefully and correct/correct such deficiencies, because if they come to the attention of the prospective buyer(s) during due diligence, this can lead to a loss of confidence, which can result in a prolonged sales process and a deterioration of pricing conditions.
Credible financial forecasts for a successful transaction process
In recent challenging years, many business owners have been convinced that „it is impossible to plan in this environment” and many firms have not even made forecasts. However, the lack of credible forecasts could be a serious mistake in a sale process, as it could give the impression to prospective buyers that the current owner does not believe in the future of the company. Furthermore, since the value of a company is typically based on its expected profitability, without credible forecasts, prospective buyers can only price according to their own perception, which is almost always more „conservative” than the company can actually achieve. No matter how uncertain the economic/business environment, forecasts based on credible assumptions are necessary to give sellers confidence in the company and to facilitate the planning/pricing tasks of prospective buyers. This is where an experienced transaction advisor can provide valuable support.
Competing with multiple bidders to maximise the value of your business
One-on-one transactions, where the seller negotiates with only one buyer candidate, have become increasingly common in recent years. This typically occurs when owners are approached by an interested party (or their transaction adviser) with a tempting offer. However, in such a set-up there is little chance that the seller will achieve the highest possible price for the company. Dealing with several prospective buyers naturally requires more effort, but is often worth it for the higher price. If a prospective buyer is aware that there is no competition for the company, he will not be motivated to offer the seller the best terms.
Continuity of day-to-day operations of the company during the transaction process
Because the process of selling a business requires a lot of time and effort on the part of the owner, and because it is easy to fall into the mindset that „it doesn't matter now anyway”, business owners may let go of the day-to-day running of the business once they have decided to sell. Conversely, it is still important that the growth and efficient operation of the company is maintained throughout the transaction process. One of the worst things that can happen in an M&A process is that the financial position of the selling company deteriorates during the process. This can result in the deal falling through or the buyer wanting to renegotiate pricing and/or other transaction terms.
Informing certain employees of the intention to sell and the transaction
Especially among SMEs, it is common for owners to keep the intention to sell a company secret from employees. In many ways this is rational and understandable. However, there may be negative consequences for some key employees. There have been cases where, after more than a year of preparation and negotiation, when the owner of a company has told employees that he has effectively sold the company to a larger competitor, some key people have resigned, saying they do not wish to work for that particular buyer. This resulted in the buyer backing out of the deal. Confidentiality of the intention to sell is the right of every business owner. However, it is worth considering whether it might not be worth communicating the plans to certain employees at an earlier stage in the process, when it is not too late to assess their attitudes and take steps to reduce any mistrust they may have.
Establishing a realistic company value for the success of the transaction process
It is perfectly understandable and rational for business owners to have a strong idea of the value of their company, even after decades of hard work. However, as with anything (e.g. product, property, etc.), a company is worth what a buyer is actually willing to pay for it. An experienced transaction advisor can help you to determine the realistic market value of a company and how to bridge any gap between the established value and the seller's expectations. For example, the transaction advisor can suggest how to deal with factors that may pose a risk to a prospective buyer, such as the phenomenon of buyer concentration or a particularly valuable property owned by the company but not necessarily willing to pay the market price in excess of the company value.
Experienced transaction advisor to assist you in your sale negotiations
It is very important that a person experienced in M&A negotiations leads the process. Someone who can defend the seller's interests against the buyer's typically sophisticated team with a lot of transaction experience. The seller will naturally want to avoid very protracted and possibly contentious negotiations, as this could lead to the deal falling through if the buyer concludes that the seller is too difficult and cannot be worked with post-transaction. At the same time, not everything should be left to the buyer, because then there is a good chance that the seller will end up in a bad deal. The transaction adviser is a good person to play the role of „bad cop” so that the business owner can remain a „good cop” in the eyes of the buyer.
Moore Hungary
Moore Global, which started in a London office more than 110 years ago, is now one of the world's leading consulting and audit networks. Present in over 100 countries worldwide, the network has more than 600 independent offices and over 30,000 employees. The group's turnover for the last financial year exceeded $3 billion.
Moore Global's services will be directly available in the domestic market from March 2021. Moore Hungary has been offering a full range of consulting services in the fields of business, financial, tax, accounting and auditing with a team of almost 100 experts since its inception.
In our fast-changing world, Moore provides strategic guidance and practical advice to help clients navigate and understand the complex regulatory and changing market environment and industry conditions, and thereby find the best solutions.
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