Key points in the sale of a company
2021 was a great year for mergers & acquisitions and experts project this trend will continue throughout 2022. This year could see a wealth of opportunities for companies considering being sold to venture capital funds or other companies.
Many actors in the sector forecast a prolific 2022 for mergers & acquisitions in Spain, where investors are seeing a window of opportunity despite the uncertainty arising from the pandemic and the conflict in Ukraine. This is fuelled by the expectations caused by 0% interest rates set by central banks, the pick-up of consumption, and the Next Generation EU fund. Many sectors are highly fragmented and comprise numerous profitable companies with a manageable size. This makes them very attractive for investors.
A good time to sell
2022 can be a year of great opportunities for all parties, also for companies considering being sold. After actively expanding their reach in 2020 and 2021, venture capital funds now have a very high level of liquidity. Estimates give them dry powder or available capital to invest of over EUR4,000 million in Spain alone.
Groundwork for selling a company
The first thing that any owner considering selling their company must do is decide the investor profile they wish to attract. Investment funds do not tend to invest in companies whose EBITDA is lower than EUR3 million unless they possess cutting-edge technology or innovations. Companies under that threshold could opt for sharing their capital in a partnership so that they can invest and increase their size before eventually being offered to a fund.
The sale process of a company usually takes 6 to 12 months. The company’s structure and operations must be in impeccable shape before coming onto the market, from a legal, tax, financial and industrial point of view. The buyer will conduct an exhaustive due diligence review to identify any contingencies that could affect the company’s value. If any, the buyer could use them to negotiate a price reduction, adjust payment schedules or require certain guarantees.
Due diligence usually encompasses reviewing, among other things, contracts, payrolls, and tax & accounting documents. The company’s balance sheet must also be as strong as possible, as well as its potential to generate future income. Profit and debt ratios, workforce, sales progress… they will all be subject to scrutiny. Therefore, it is recommended that the company being sold enter into a confidentiality agreement to shield it from any loss of sensitive information.
Maximising yield on the sale of a company
As with an auction, the more potential buyers a company attracts, the bigger its chances are to secure a higher selling price. If one of the buyers asks for an exclusive sale or fast-track process, the seller is advised to set a deadline for receiving binding offers.
Other aspects that usually affect selling prices are timescales and forms of payment. Buyers seeking short-term financing from a bank will be in quite a different position from those able to secure a long-term deal.
Operational matters, such as the continuity of the current management over the coming years, can also have a major impact on the price. A buyer unable to count on the current board’s continued involvement will usually make a considerably lower purchase bid.
Whenever a deal is closed, the whole negotiation process culminates with a written agreement between all the parties. That is, a private share purchase and sale agreement which precedes its formalisation in a public deed and subsequent registration with the authorities. At this point, it is essential to benefit from the oversight of a legal and financial consulting firm that specialises in M&A deals, but the best approach is to seek their advice from the minute the decision to sell is made.