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;