Success factors for a successful company sale
Every company sale involves both opportunities and risks. However, typical procedures have emerged that characterize a successful company sale.
1. Clarity in defining the objectives of the transaction
The target definition for the sale requires a concrete, time-bound and feasible strategy. Key questions must be answered in advance to avoid getting bogged down right at the start.
- Should 100 % of the company shares be sold and the existing shareholders leave the company?
- Is a strategic partner being considered that can secure the future of the company and new sales markets?
- Which prospective buyers are even worth considering for the target company?
During the definition phase, the highest level of secrecy applies to everyone involved. The circle of advisors should be kept limited. Once the rumor of a sale is circulating in the industry, customers, suppliers, competitors and unfortunately also the company’s own employees often react irrationally.
2. Realistic price expectations
Purchase prices for small and medium-sized, unlisted companies fluctuate, as do stock market prices. Unrealistic price expectations are the ‘end’ of every transaction. A company valuation should therefore always be future-oriented and based on comparable companies. In addition, valuations based on previous transactions can provide an indication of the value of a company. The most important task is to find the optimal transaction for the company, including the best possible presentation of its future potential. In this case, ‘optimal’ does not always mean achieving the maximum purchase price, as other aspects are also important. These include the type of sale (share deal/asset deal), job guarantees for employees and a fixed-term consultancy agreement for the entrepreneur to ensure a smooth transition or compliance with promised investments or risk limitation in terms of liability.
3. Avoiding emotional entanglements between the negotiating parties
During the entire sales process, emotional reactions of the negotiating parties can jeopardize the success of a transaction. For this reason, the use of an experienced M&A team with many years of experience is recommended. The team’s task is to uphold objective arguments or, if necessary, to defend uncomfortable positions.
4. Professional project and time management
The time required for the entire sale or purchase process is often underestimated. Without professional project management and a defined schedule, one can quickly lose control of the process; in the worst case scenario, the project can stall. To avoid this, it is best to follow standard market rules. In other words, before the sales process is initiated, the company must make various preparations. The preparation of a meaningful information memorandum for potential buyers and investors is the key to success. Professional prospective buyers insist on plausible and detailed planning as well as concrete answers to any ambiguities. The time required from the initial approach to the realization of the transaction also depends on whether you are dealing with financial sponsors or strategic buyers from the same or a related sector. In addition, external approval or authorization requirements can delay the transaction.
5. Focus on several potential buyers
The selection of the ideal buyer requires careful analysis of all potential buyers and their market environment. It is not unusual for only 10 out of 100 contacts to be worth presenting to management. After the presentation, subsequent process steps (Letter of Intent, Due Diligence,…) select the remaining interested parties until the ideal buyer emerges at the end. The positive side effect of such a process is the significantly higher transaction values that can be achieved.
6. Error-free information management
Due diligence is the crossroads within a company sale. In this phase, the prospective buyer thoroughly examines the target company. For this purpose, a data room must be set up in which all of the company’s important documents are disclosed. The better a data room is prepared, including the disclosure of possible “skeletons in the closet”, the fewer surprises there will be when drafting contracts and the better warranties and guarantees can be negotiated. The seller often makes the mistake of spreading information about the company on offer too quickly and too widely. In the case of a sell-side mandate awarded to an experienced M&A advisory firm, sensitive information is disclosed in a balanced and timely manner, and only if the acquirer is genuinely interested. For enterprises with the legal form of a publicly listed company, a legal advisor should be consulted in case of doubt, as the board of directors can get into a conflict situation.
7. Realistic forecasts
The M&A team’s strategy is to arouse the interest of potential buyers in the acquisition opportunity. A company sale is therefore unthinkable without a reliable information memorandum and comprehensible planning. A common mistake in M&A is so-called hockey stick planning. When preparing for the sale, assumptions are made in the planning euphoria that are not in line with past developments or are simply unrealistic. An average company suddenly becomes an extraordinary growth company. This tends to deter potential investors. Experienced M&A advisors are aware of this momentum and, together with the entrepreneur, avoid unrealistic future forecasts.
8. Successful timing
A transaction can also fail due to bad timing. It is recommended that the industry cycles and current business trends be taken into account when planning the transaction. However, from the moment contact is made with potential buyers, one thing counts above all: speed. Ideally, all interested parties approached can be guided through the transaction process in parallel according to a fixed schedule.
9. Successful continuation of business operations
As important as the strategic preparation and execution of the transaction is, the entrepreneur should not neglect his day-to-day business. The moderation and organization by an M&A advisory firm helps to relieve the management and give the entrepreneur the necessary time to concentrate on the operational business. Positive business figures along the process create tailwind in the negotiations.
10. Confidential involvement of management
The sale of a company always means a step into an uncertain future, especially for the employees. Experienced M&A advisors avoid premature and negative information until facts have been established. As a rule, existing employees are only informed after the purchase agreement has actually been concluded. In larger companies, however, there is a need to form a core management team whose task is to support the preparatory transaction in strict secrecy.
For the entrepreneur, the success of a transaction is not just about taking the ten success factors in M&A into account. Above all, it lies in the coordinated handling of all possible risks. A lack of time and experience do the rest. This is where experienced M&A advisors can help. They are familiar with possible transaction types and structures as well as their pitfalls and are familiar with standard market valuation methods. Through negotiation experience, they can de-emotionalize the process and accompany the entrepreneur as an objective third party. Direct access to strategic buyers in the industry and to reliable financial sponsors is also advantageous. A positive side effect is that management time is relieved throughout the entire process. Experienced M&A advisors provide the strategy for success.