Series of articles "M&A Basics: do you want to sell your company?" will take you through the process you will need to go through if you decide to sell your company or if you decide to bring in a strong partner. We'll go through each stage of the transaction step by step and describe the basic risks you'll face. Good reading!
Sales and acquisitions of companies (or businesses) are a normal part of business life. Buyers are most often financial investors who want to value their investment primarily through future sales, or strategic investors who see in another company the potential for their own expansion. The seller can be anyone whose company is of interest to investors. By the way, if you want to sell your company but don't know of any potential investors, try asking financial or legal advisors who are in these "transactional waters", they will certainly be able to direct you.
The first step of the transaction (of course, as soon as you have found an interested party) is the exchange of basic information, a preliminary valuation and an indicative offer from the investor, followed by an agreement between the parties on the principal terms and conditions of the transaction. The interests of the investor and the seller are most often protected at this stage by means of a so-called Termsheet, in which the parties jointly define their expectations, including the value of the shares to be transferred / number of shares to be transferred and the amount of the purchase price.
Most of the provisions of the Termsheet are formulated as legally non-binding. This means that signing the Termsheet does not guarantee that the transaction will actually take place. The purpose of the Termsheet is for the parties to agree on the essential points, terms and conditions as well as the way forward. In addition to the value of the shares to be transferred and the amount of the purchase price, the Termsheet usually covers in particular the structure of the transaction, how the purchase price will be adjusted and how it will be financed, a description of the individual steps and conditions of the transaction, the manner and extent of indemnification for latent defects, non-competition, possible post-closing cooperation of the parties, exclusivity, etc.
Although the Termsheet is essentially a "non-legal" document, sellers are advised to consult with financial and legal advisors with M&A experience.This is because established investors sometimes have terms in their Termsheets that may not be appropriate or acceptable for a particular seller. Although the terms of the Termsheet are non-binding, it is better to refer to the wording of the Termsheet later when negotiating the transaction documentation. In addition, it is also a good idea to understand what is left unsaid in the Termsheet at this stage.
The second aspect that comes to the fore at the beginning of the transaction is disclosure and protection of information. You need to be prepared that the investor will require very detailed information from you about every component of your business, often including trade secrets. If the potential buyer is a competitor of yours, this can be a big problem, especially if the transaction ultimately does not go through. A Non-Disclosure Agreement (NDA) is in place for this purpose. An experienced investor will prepare the wording of the NDA, but beware, the information is yours, and it is therefore in your interest above all that the NDA contains provisions that will sufficiently protect you and that will deter the investor from breaching the confidentiality obligation.
Once the Termsheet and NDA are signed, the transaction process gets underway. Find out what's next in the following M&A Basics series posts.