Selling a business: Tackling to let go
From my experience, the primary goal for the consultant is that the entrepreneur must understand and grasp the process as a project for himself and his company. He must want to secure his life’s work for the future and make it fit, then this process becomes at least as important for him as the development of a new product, or the successful implementation of other transformation processes. The decisive factor here is that a certain dynamic is built up and maintained in “in-house” projects and processes. If this dynamic weakens too much, there is a risk that the transaction process will fray and cannot be successfully completed. To build and maintain momentum, it is helpful to explain the process in detail to the entrepreneur, as well as the individual process steps and how they work. The better the entrepreneur understands the process and internalizes the dynamics, the more purposefully the process can be managed. It is also important to make it clear to the entrepreneur that although the buyer will control the fate of the company after the sale, the seller can influence the fundamental direction for a limited time by setting the right course through a structured and professional process.
In this phase, the supervising attorney must regularly assume the role that the M&A advisor performs in larger transactions. The individual process steps are to be presented and explained in detail to the entrepreneur as a non-expert in order to “take him along on the journey” and to maintain a determined expectation, communication and time management. This is the only way to involve the entrepreneur emotionally, to convey to him that the consultant has the process under control and to try to trigger in him a “tackling with a view to letting go”. The legal and business issues take a back seat to the psychological difficulties.
In this context, the entrepreneur must make a difficult change of perspective. Up to this point, he has regularly made decisions on his own, rarely seeking only the advice or even the view of third parties. After 20 or more years, a stranger suddenly tells him what to do and what not to do, who to talk to and when, what and how to communicate in an area in which he had previously had unrestricted control, namely in his company. This change of perspective is psychologically quite a challenge; also because it has to be sustained and internalized over a longer period of time. In my view, this can only succeed by successfully involving the entrepreneur in the process and making it his process.
The contractor’s involvement in the process is also facilitated by the early creation of a (virtual) data room based on a comprehensive due diligence list. It is true that the prospective buyer regularly submits his due diligence list — but if one waits until this point, valuable time is lost and the consultant often misses important aspects and details that can later lead to unpleasant inquiries on the part of the buyer and have an impact on the price or warranties. Experience also teaches that this can be better organized and implemented in advance than from a point in time when a letter of intent has already been signed and the entrepreneur thinks that now everything is actually as good as done. Ultimately, however, this exercise also enables the entrepreneur himself to take a critical look at his company, uncover weak points and possibly even eliminate them in advance.
In the course of compiling the data room, it also often becomes apparent that the entrepreneur has not stringently separated private hobbies and preferences from business matters, but that there is an economic intermingling of the two spheres. Particularly popular is the fleet of cars equipped with noble cars, sports aircraft or the like. In addition to tax risks, the potential buyer often has other ideas in this regard, so that it can make sense to clear up these issues beforehand, also because they may have an impact on the purchase price determination. If the associated costs are identified and eliminated at an early stage, this can have an impact on the valuation that should not be underestimated.
The consultant’s creation and review of the data room also proves helpful with regard to the most central point of the process: the purchase price determination. Often the entrepreneur has a clear idea of the value and price of his business. Regularly, this idea ranks from ambitious to completely unrealistic. In order to objectify and substantiate the value ideas, findings from the data room are regularly helpful and also provide a good argumentation aid for presenting and defending the demanded price to the buyer, who naturally has an opposing interest in this regard.
Often, the contractor undertakes the negotiation of the LOI on its own and craft flawed or incomplete agreements that do not map essential issues or where the parties have unrecognized differing ideas. It is difficult to judge whether this is done for reasons of economy or because the entrepreneur believes that it only makes sense to call in a consultant when an LOI is available. What is certain, however, is that an unprofessionally drafted LOI will make subsequent negotiations more difficult rather than easier. Thus, the buyer and the seller regularly have different ideas regarding the allocation of the result of the current business year, although this point is settled by them only in the rarest of cases. However, this can quickly amount to a higher six-figure sum. In comparison, the consulting costs quickly become the proverbial “peanuts”.
The seller must be made aware of the risks associated with so-called “earn-out provisions”. Purchase offers are regularly adorned with earn-out provisions that defer a significant portion of the purchase price into the future and are made contingent on the achievement of certain economic goals. However, the seller is no longer the master of the house after the transaction has been completed, provided that he is still active in the management at all and is not employed as a consultant. As a result, he regularly has no real influence on the agreed target achievement and thus no influence on the payment claim. Smaller companies in particular are quickly incorporated by the acquirer into its organization and structure after a transaction has been completed, which may make sense from the buyer’s point of view, but raises considerable questions and difficulties for the determination of the earn-out and thus represents a high uncertainty factor for the seller.
We often see potential buyers trying to negotiate directly with the entrepreneur, bypassing the consultants, and thus circumventing or undermining conditions set by the consultants. A popular strategy here is for the potential buyer to suggest to the entrepreneur that the consultants he has engaged are unnecessarily complicating and dragging out the transaction. The aim is to induce the entrepreneur to talk directly to the buyer in order to achieve a “quick deal”, since “an agreement has already been reached”. Due to a lack of experience, it is not always clear to the entrepreneur what the economic effects of the “concessions” made by him mean for him. It is then not always possible to go back on the commitment made without losing face. Stringent communications management is therefore also crucial.
- Understand the process as an internal company project.
- Choose the consultant you trust, not the one who promises the most.
- Be ready for clear time and communication management with your consultant.
- Talk to your consultant rather than the potential buyer.
- The future of the company is the responsibility of the buyer, but you can determine who that will be.
About Sébastien Graf von Westphalen
Attorney since 1995. Main practice areas are corporate law, M&A, advising medium-sized companies and families in Germany and abroad (mainly France), structuring and negotiating joint ventures, private equity
recently accompanied transactions:
LISI SA for 2 decades in all German acquisitions and sales;
German family-owned group in the acquisition of a Dutch target company;
German family-owned group in the acquisition of an Italian target company;
Accompaniment of the shareholders in the succession solution and the sale to HG Capital;
Support and structuring of the sale of a part of the company in the area of prefabricated construction;
Accompaniment of a french. family group in the purchase of a chain of kindergartens;
Corporate restructuring of a medium-sized pharmaceutical company;