In this article, we will talk about general metrics used in 21st century business models. We will first explain some general metrics applied to almost all of the models, and then we will dig deeper into some of the 21st century models in the 3rd part of this series. We will explain their general value propositions, highlight metrics to evaluate them and expand on other relevant information.
Referring to Metcalfe’s Law (which states that the value or utility of a network is proportional to the number of users of the web), the main goal of these companies is to grow at an exponential pace by attracting and engaging a network of users/customers.
We need to understand that these companies require the infrastructure to support the inflow of clients, so they spend at what appears to be an unsustainable rate. Hence, we need a new way of analysing 21st century companies.
There are increasing returns to scale in 21st century businesses, which differs from how returns accrue to old-world businesses. Because growth and maintaining the architecture that supports that growth is their primary mission, we need to look at how we assess these companies to understand why sometimes a lack of earnings and a correspondingly high multiple might not necessarily be a bad thing.
Even if a 21st century company is profitable, understanding which metrics directly affect these companies’ valuations will help understand their business models better to make a better assessment. In the following sections, we will review some of the 21st century models.
2 types of general metrics used in 21st Century Business Models
When assessing a 21st century business plan and financial model, there are two types of general KPIs, customer and financial. We can say that these available metrics are the root for all the other metrics to be explained in this series and they are employed differently in different business models.
Customer KPIs directly affect the uppermost items in a P&L. They are more related to customer acquisitions, which turns into revenues. They explain in a broad sense how the network effects are materialising in a business. If there is any recurrence from customers, these metrics can explain how these customers convert into future cash flows. All in all, these are the revenue drivers.
Financial KPIs are used to explain the value of these customers/users in a comprehensive valuation. They also explain how direct costs affect that value. We are more used to financial KPIs than customer KPIs. From here on, each 21st century business models is reflected in branches of both these general KPIs.
1. In a marketplace model, GMV is probably extremely high compared to actual revenues as it takes all sales made through the platform instead of the income received. 2. For companies with no net profits or positive EBITDA but with a strong user/customer base and high growth, it is best to use EV/active users or EV Revenue (Sometimes Annual Recurring Revenues (ARR)) for valuation purposes.
Explaining Churn
Customer Churn:
Measures how much business you’ve lost within a specific period. It is one of the most critical metrics in tracking the day-to-day vitality of your business.
As most digital businesses operate under some recurring revenue model, keeping customers is as important as acquiring new ones.
To calculate customer churn take all your monthly recurring revenue (MRR) at the beginning of the month and divide it by the regular monthly payment you lost that month minus any upgrades or additional revenue from existing customers.
Customer churn rate = (Customers beginning of the month – customers end of the month)/customers beginning of the month.
Do not include new sales in the month, as you are looking for how much total revenue you lost.
Revenue Churn:
It’s essential to measure revenue churn alongside customer churn to evaluate the outside impact some customers might have over others. Tracking and understanding revenue churn is necessary for measuring a company’s financial performance and outlook.
To calculate revenue churn, take the monthly recurring revenue (MRR) you lost that month — minus any upgrades or additional revenue from existing customers, and divide it by your total MRR at the beginning of the month.
Explaining Lifetime Value / Customer Acquisition Cost (LTV/CAC):
Customer Acquisition Cost (CAC):
It shows precisely how much it costs to acquire new customers and how much value they bring to your business.
When combined with LTV, this metric helps companies guarantee that their business model is viable.
To calculate CAC, divide your total sales and marketing spend (including personnel) by the total number of new customers you add during a given time. For example, if you spend $100,000 over a month and added 100 new customers, your CAC would be $1,000.
CAC Payback Period:
It helps determine how long after you’ve closed a customer you recoup the total CAC. In other words, CAC Payback Period gives you an idea of how quickly a customer starts to generate ROI for your business.
CAC Payback Period is calculated by taking your Customer Acquisition Cost (CAC) divided by your Average Revenue per Customer (ARPU). CAC Payback Period = CAC / ARPU
The general benchmark for startups to recover CAC is 12 months or less. High performing SaaS companies have an average CAC payback period of 5-7 months.
Lifetime Value (LTV):
The average amount of money that your customers pay during their engagement with your company. The metric provides businesses with an accurate portrayal of their growth and can be explained in three steps:
Divide the number 1 by your customer churn rate. For example, if your monthly churn rate is 1%, your customer lifetime rate would be 100 (1/0.01 = 100).
Find your average revenue per account (ARPA) by dividing total revenue by the total number of customers. If your revenue was $100,000, divide it by 100 customers and your ARPA would be $1,000 ($100,000/100 = $1,000).
Finally, find your LTV by multiplying customer lifetime by ARPA. In this example, your LTV would be $100,000 ($1,000 x 100 = $100,000).
LTV shows what your average customer is worth. And for those still in the startup mode, it can display your company’s value to investors.
LTV / CAC:
Shows the lifetime value of your customers and the total amount you spend to acquire them — in a single metric.
Healthy between 3-5X. Anything lower than 3 means either you are spending too much or making lousy marketing investments. Anything higher than 5 could mean that you are not investing enough in your marketing, hence missing out on good potential business.
About ONEtoONE
Our company, ONEtoONE Corporate Finance, is specialized in international middle-market M&A advisory. We are continuously focusing on improving the techniques to achieve the best possible price for our clients, and we also advise on acquisitions, strategic planning and valuation. We are pleased to give our opinion about company valuation or other aspects of a possible corporate operation. If you need an advisor while buying or selling a company, contact us.
We say some companies have 21st Century Business Models for two reasons. Firstly, although tech companies have been around for decades, in this century industries are being disrupted not by technology itself but by companies with certain business models and specific characteristics. Secondly, these are business models born with the internet boom at the beginning of this century.
Let’s face it, there is a noticeable knowledge gap between traditional financing and investment firms, corporate finance, corporate development, and companies with innovative business models. It’s like in movies when superheroes could do amazing things together but they don’t understand how they can be of value to each other. That would, arguably, explain why this knowledge gap exists. The reality is that these pillars that fuel growth need to understand each other more than ever. Our digital, tech, and new business model experts at ONEtoONE Corporate Finance decided that it was time to bridge this understanding. This 10-part series intends to so. Our goal is that:
Investors, who finance growth or acquire companies, know what to look for and understand the value of certain companies with 21st Century characteristics.
Corporate development managers and strategic buyers know what they should be looking for when sourcing potential acquisitions.
XXI century CEO and Directors know what they would need to communicate to investors.
Corporate finance professionals know how to add value to investors, acquirors and their sell-side/private placement clients.
In the series “Understanding 21st Century Business Models” we look to explain these models, what drives them, how they came to be, how they are innovation catalysts, general metrics that they use, and how to value the companies using them.
The series is divided as follows:
General metrics used in 21st Century Business Models. Understanding 21st Century Business Models: Explaining 3 main business models in detail, plus 4 bonus business model summaries.
E-Commerce.
Marketplace.
Bonus Model 1: OmniChannel.
Cloud Market Group: X as a Service.
Mobile Apps.
Bonus Model 2: User-Generated Content.
Bonus Model 3: Cloud Restaurants (Dark Kitchens).
Bonus Model 4: Decentralized Finance (DeFi).
Valuing XXI Century Business Models.
What are 21st Century Business Models and what drives them?
We are in the age of the customer-centric approach. By customers, we mean anyone or anything that would use a product or a service, meaning users, clients, businesses, governments, and citizens. In the 21st Century, business value creation is being driven by a customer-centric blend of physical and digital business models.
Source: Forrester Research. Design: ONEtoONE
Due to technological capacities, an extreme shift in demographics, ever-growing interconnectivity of humans, and a demand for faster human development, these models are characterized by their ability to scale at a faster rate and offer a bigger geographical reach than before, with higher profit margins and use of technological advancements allowing them to reach target markets faster.
The core of a 21st Century Business Models is the value proposition that solves a customer problem or satisfies a customer need.
What is driving these customer needs?
How they came to be?
21st Century Business Models are not digital or technological companies themselves. Instead, they use technology to create new value in business models, customer experiences and the internal capabilities that support its core operations. In many cases they become digital companies, but before they get there they must go through innovation frameworks. 21st Century Business Models are designed as innovative responses to specific customer needs.
These business model innovations, whether digital or not, disrupt industries, creating new verticals within them that adapt new business models. Some of these verticals we call “Industry”-Tech. The best 21st century companies are digital companies that identify gaps in existing industries and business models that can be improved upon and/or exploited to better serve customers.
Our focus with this document is to illustrate some of the business models that allow for industries to be disrupted today. Hence, most of the business models to be discussed are digital. However we just wanted to clarify that they do not necessarily need to be digital models.
Some examples of 21st century verticals are:
Mobile
Mobile commerce
Micromobility
PropTech
MortgageTech
RestaurantTech
Mobility
Micro Mobility
SaaS
Virtual / Augmented Reality
3D Printing
AdTech
AgTech
AudioTech
Machine Learning / AI
Big Data / Analytics
PaymentTech
Medicinal Cannabis
ClimateTech
CloudTech & DevOps
Crypto Currency/Blockchain
Cyber Security
E-Commerce
EdTech
Digital Health
Content Creation
E-Sports
Gaming
Who paved the way?
5 ways digital businesses innovate:
1. Asset-less platforms
Uber is the world’s largest “taxi company” and doesn’t own a fleet of vehicles. Airbnb has the most “rooms” but doesn’t own a group of hotels. Facebook is arguably one of the largest content companies in the world, all without producing content. What about Youtube? Companies don’t have to own the hard assets to provide the service. Users just want the service. Get the point?
2. Data
More data has been created in the past few years than in the entire previous history of the human race. Websites, smartphones, and sensors’ data are produced and collected around the clock. Determine what unique data you have, what you can obtain, and then how to use it to add customer value in ways that lock out the competition and create new revenue streams.
3. Change the economics
“Make money” by simplifying the pricing concept:
Selling products as individual units.
Products bundled together or with services.
Charge by the time of use.
Full or partial access.
Subscriptions for a specific period of time.
Memberships (single or group membership with or without tiers of value).
Licenses (for a given time, or with escalating sets of features).
Platforms (membership fees with or without transaction-based revenue sharing).
Modify the revenue stream:
The user pays in a different way.
Fixed fees vs commissions.
Pay per use.
Freemium.
Make a third party pay (hidden revenue).
The user gets free service/product and other pays.
Ads (Ex; Google or bus stops).
Discounts difference or fees on another’s product or services.
Get paid from the savings or earnings achieved by your clients.
Create network effects
Metcalfe’s law states that the value of a network is proportional to the square of the number of connected users of the system. So, the more users, the more users get attracted to the network, and the more value is added to the network itself. The bigger the network and its interactions, the bigger the company value. There are many types of networks, each with virtually endless business model opportunities:
5. Combine innovative markets with business structure strategies
Explore the fundamental assumptions of current players in your market segment and then find business models from outside your space that disrupts the status quo.
Modify or eliminate steps in the value chain.
Associate with competitors, suppliers, or complementary businesses.
Think on: Who is your target market? Who else targets them? How can you target them together?
Reduce the customers’ experience hassle and complications using a product or service.
Break an industry belief.
Know the success factors that have withstood time. Can they be changed? Do restaurants and bars need a physical place to serve customers? Should hotels have a reception? Do bank loans need guarantees?
This article was written by José Ramírez Terc, specialist in 21st century business models.
About ONEtoONE
Our company, ONEtoONE Corporate Finance, is specialized in international middle-market M&A advisory. We are continuously focusing on improving the techniques to achieve the best possible price for our clients, and we also advise on acquisitions, strategic planning and valuation. We are pleased to give our opinion about company valuation or other aspects of a possible corporate operation. If you need an advisor while buying or selling a company, contact us.
As in every sector, agriculture company owners and investors often disagree when negotiating the terms of a potential company sale. This has become an issue in the M&A in the Agri inputs sector. Investors may not have specific agriculture sector expertise. Even if they do, they may lack the ability to effectively manage a company’s business in a new agriculture vertical or operating environment.
Today, the agriculture industry overview is going through a process that could be summarised as follows:
Population growth
Limitation of arable land
Commodity price volatily
Food consumption
Within this process, there are many actors involved. The first link would be the Tech and input providers, farmers, processing companies and distribution, food companies, and the end consumer.
However, for 2050, we have a challenging scenario, when it is expected to grow 70% in the food demand with limited arable land. This will force the AgriTech sector to meet this demand. In the following reporting, you will find all the necessary graphs and information on this topic.
Another highlight of this reporting is the specific study of the agriculture market, where you will find general data, you will also get data about the crop protection sector, the overview of the fertiliser sector, the chronology of the plant nutrition sector, the competitive environment of plant nutrition and, of course, a history of the transactions carried out by the ONEtoONE team and much more!
Download the “M&A in the Agri inputs sector” reporting, written by our ONEtoONE Partners Rodrigo Maimone Pasin and José Ramón Cos and find out the most relevant facts about the world of AgriTech.
If you are a company owner, you may have never considered your company’s sale, but it is a world surrounded by technicalities and processes that you may not understand.
As specialists in companies’ sales, we can help you understand the key documents you need in each phase of a sale
A company sale and purchase operation is undoubtedly a complex process that requires a team of consultants specialized in the company’s activity sector. Below, we detail the main phasesof a company’s sale process and the necessary documentation for each of them, giving the key details on each of these stages.
The first step when deciding that a company is going to be sold is to analyze which process we want to carry out and carry out an analysis of it, as well as of the company to be sold.
Once you decide to sell your company and the type of transaction you want to carry out, the next step is to sign a sales mandate.
This document specifies what the costs derived from the sale will be for the sold company. The signing of this signifies the beginning of the sale process of the company.
Once the consultants start working on the mandate, the first thing they will do is request information about the company. All the information required will be essential for preparing the necessary documentation for the execution of the sales process.
The first document produced is usually the so-called blind teaser.
The blind profile (or teaser) is a document that includes the general characteristics of the company being sold but doesn’t contain any information that would make it possible to identify the company. This document is the first document that potential buyers will be shown to help them decide whether or not they are interested in buying your company. They are approximately two pages long, and contain general information regarding the company and its operations.
The blind profile includes a description of the main characteristics of the company, the reason why the owner(s) wants to carry out the sale, key financial figures from recent years in terms of sales, profits and debt, the expected growth projection for the next three years and the advantages that this operation can bring to the investor. In the blind profile, it is not advisable to include a price since you establish a limit before even the first negotiation.
Preparation of a sales notebook or company report.
After the teaser, the next document should provide more information about the company to potential investors (once they sign a confidentiality letter or NDA).This is the Sales Notebook.
This document will consist of six main sections:
Executive Summary
Vision of the sector and subsector in which it competes
Study of the company, from its inception until now, analysis of threats, strengths, weaknesses and existing opportunities
List of competitors, market share and competitive strategies
Financial data
Growth potential
The company’s sales notebook’s objective is to provide potential investors with all the necessary information to know if the investment may be interesting for them or if, on the contrary, they should not continue participating in the process. The notebook should reflect the reality of the company, as well as its most positive aspects.
The key to this phase lies in the professional presentation of the information, establishing transparency and seriousness parameters. Unlike the blind profile, this document gives the necessary data to identify your company and provides potential buyers with more details.
Assessment report and contact with candidates.
Once you have the blind profile and the sales notebook, it is time to know how much your company is worth so that you can start negotiating the sale; this process is called a valuation and will result in the creation of a Valuation Report.
The preparation of a valuation report is an essential job; it can enable a better negotiation with investors and help you to maximize the price of the company by having logical and worked numerical arguments to support your case. Furthermore, evaluating your company will help you know where you are starting from, your company’s position in the market, and its value.
Business valuation is a necessary activity in most corporate operations.
Once you have all these documents, you will have to decide which candidates best suit the proposed operation; for this, a Mapping of potential counterparts is carried out, made up of two lists (a longlist and a shortlist) of investors who potentially fit the purchase of the company.
A mapping of potential counterparts, a list of companies to contact, is the most feasible for this search. You will have to find all the candidates whom may be interested in purchasing your company. This mapping will be our pillar upon which the entire search and negotiation process will be supported.
At this time, it is essential to have good advisors who look for and find the best buyers for your company since it is a crucial moment on which the sale agreement that is made totally depends.
Often, the best buyer is not the most obvious, such as a domestic buyer or a competitor of yours, but a less obvious choice, like a company from a related sector, for example.
After creating the list of potential investors and having contacted them, the next phase is marketing. The first thing is to create a Confidentiality Agreement or NDA, which contains details about what information is confidential, which both parties are subject to. After this, interested buyers can receive the company’s Sales Notebook.
Next, interested investors will have to issue a first Indicative Offer or letter of interest. They will detail, without legal validity, the offer that they propose to the company, including information such as the price they offer, how it would be paid and the purchase deadlines.
An indicative offer can have a significant impact on an entrepreneur who until then had never considered selling his business, as Enrique Quemada, president of ONEtoONE explains;
A businessman once told me that, while he was in a meeting, a messenger arrived at his company and insisted that they had to personally deliver a letter to him. The businessman went out, picked it up, and read the letter. In doing so he came across an indicative offer on his business. He couldn’t believe it. “They want to buy me!” He thought. And he began to imagine what he was going to do next, what he would do with the money and how to tell his family about it.
Negotiation and Due Diligence Process.
Once indicative bids are obtained from the candidates, the agreement of intent – also called the Agreement of Intent or Letter of Intent (LOI) – is signed with the potential buyer with whom there is the best fit. This agreement of intent declares the commitment to begin a negotiation of the pending aspects of the deal that will eventually culminate in a definitive contract of sale. The seller’s strength is much greater before the agreement of intent than after; which is why it is essential to reach this point with the highest level of understanding and trust possible.
The agreement of intent sets the basis for the negotiation and establishes a reference figure on the price to be paid. The points on which an agreement have to be reached are established, and time limits are set to close the negotiations.
Once the buyer feels comfortable with their offer and wants to take it to the next level, the so-called Binding Offer is made, an offer that does have legal value and indicates the conditions of the purchase that the investor offers your company.
After the agreement of intent comes the Due Diligence, the most sensitive part of the process, which consists of checking all the documentation and information previously delivered. It is a very complex process that requires a great deal of preparation on the seller’s part, mainly in correcting possible irregularities in management and ordering all the documentation correctly.
Once the first direct contacts between the parties begin, the negotiation phase begins. Depending on the level of negotiation, the negotiating parties can program a Data Room so that access to information for the different buyers is more easily managed by the seller. Finally a controlled auction process is held with the participation of the shortlisted candidates with serious purchasing intentions.
Closing of the Sale.
Once an agreement has been reached, it is time to close the sale; thus, the so-called Purchase Agreement or SPA will be signed.
This document details all the information about the transaction and is one of the most important documents in the entire process since it includes all the conditions under which the sale will occur. That is why it is essential to have a good team capable of achieving the best agreement for you and your company.
The sales notebook must include these sections:
Description of the transaction.
Terms of the agreement.
Representations and guarantees.
Limits on liability.
Conditions.
Annexes.
The process of selling a company is very complex. That is why it is essential to have the help of a company specialized in mergers and acquisitions, since they will take care of all the steps and advise the selling party on everything they need. Do not hesitate to contact us!
At ONEtoONE, we are characterized by the transparency, confidentiality, and professionalism with which we handle our clients’ operations. One of our best allies is the trust we generate through our work. Therefore, we encourage you to contact us if you seek advice for the sale of your company. And remember, confidentiality is the key to success.
Every company has an optimal time to be sold, and it is vital to make an effort to know and be aware of it so as not to regret it later.
As advisors, we start working with a company one or two years in advance of a sale. We prepare it to improve its value, make it more attractive, attract more buyers, increase the probability of success, remove obstacles that would hinder the sale, and minimize the tax impact and equity consequences.
One of the main objectives of the preparation is to identify the critical areas for improvement, act on them, and reduce the potential risks that a possible investor currently perceives. The more attractive you make the company to the investor, the more you can ask for and the more you will receive for it.
There can be many reasons why an entrepreneur would consider the opportunity to sell their business. Here are some circumstances that may make a sale or investor search desirable:
For personal reasons: The businessowner is preparing themself for retirement, they want to do something different in their life, change of business or increase dedication to other more profitable companies that require more attention, due to health problems.
For familiar reasons: Disagreements between family members over management, lack of interest or preparedness of children to continue leadership.
For corporate reasons: Conflict of interest among shareholders, financial investors wanting to exit, different financial capabilities among partners.
For economic reasons: The company needs a new injection of resources, technological obsolescence, lack of access to growth capital, receipt of a good offer for the company, the value of the real estate assets on which the company operates is higher than the value of the business.
For competitive reasons: The entry of a powerful competitor, growth, relocation, loss of human capital, the company has maximized its potential in its market, the loss of essential costumers, a stage of peak value in the sector or the appearance of substitute products.
For legal reasons: There are changes in the sector’s regulatory environment or tax and fiscal policy.
10 Keys to attracting investors
Having listed the circumstances that may lead an entrepreneur to sell their business or to look for investors, it is now necessary to list the ten key points that will help you to attract investors.
1. Understand what you want and what you are aiming for. Our objectives give us direction, but our expectations give us the strength to negotiate.
2. Fail to prepare, prepare to fail. 99% of success is due to preparation. During the process, you must work out the opportunity it represents for the buyer: What are their economic motivations? How much do they expect to earn from your company? What do they want it for? What do they intend to do with
3. Reach an agreement with the “best” alternative investor you have. If you lack alternatives, you lack negotiating power, and the buyer will take advantage of it to get constant concessions. How do you know if that buyer is the right one? Is it the one for whom your company creates the most value or who can pay the most for it? Only a sound methodology for searching for alternatives will allow you to find out.
4. A good negotiator asks a lot, talks little and listens well. Share information, but above all, get relevant information. Ask twice as many questions as your counterpart, request clarification of answers and summarize what they have heard to check that they have understood correctly.
5. A good negotiator builds trust and never lies. They do not create expectations that they will not fulfil and they keep their promises. They earn the respect of the other party during the process because they are reliable.
6. Create the optimal conditions for a good “negotiating framework” before meeting the other side at the negotiating table. Having the right people at the table achieves the above. It would help if you did a mapping of the interests of all the parties involved in the negotiation. Is there anyone who might torpedo the operation because they have other interests? How can they be convinced to help?
7. Identify the actual decision-maker. In addition to the acquiring company’s interests, there are other interests to consider, including those of the people negotiating. You have to find out who is making the decision and their interests, their needs, and what they themselves are looking for. Do they have the authority to close a deal?
8. Show interest in the interests of the other parties. This will make them care more about your interests too, a win-win situation. Building empathy helps to create a favorable climate for negotiations. Be strict in your demands and understanding of the other parties. Negotiation is a game of information, and information gives you power. You should seek to understand their needs rather than their wants.
9. Power is a very relative concept. In negotiation, power will depend on your alternative investors and the alternative opportunities of the other party. Don’t forget that 50% of negotiation is emotion. You must understand and control your emotions towards the talks.
10. A good negotiator can make the pie grow, instead of fighting for the biggest piece. They maximize its value by helping both parties achieve their goal. The first step is to believe that it is possible. Negotiation is an information game, which is why the best negotiators focus more on receiving information than giving it. If you know how to dig deeper into the other party’s needs, you will discover things that are very important to them and do not entail a high cost for you; you can exchange them for things that are essential for you and that have little significance to them.
First contacts with investors
To embark on finding the best investor, the seller must have a team of specialist advisors who can advise and guide them throughout the process and help them make the best decisions. If a seller dares to sell their business without any help, they are likely to fail.
As a professional expert, the advisor makes the first contact with the potential buying company’s decision-maker. This person is usually, depending on the company’s size, the owner, the CEO, the Managing Director or, in larger companies, the Corporate Development Director of the relevant division.
Making a personal contact with an investor is not easy and requires a lot of effort:
Identify them.
Know how to overcome filters, be consistent in calls.
Interest them.
When we speak, we outline the type of transaction you are proposing and why you see it as a precise fit with your company’s competitive strategy without ever identifying the company. If the investor is interested, a blind teaser is sent across.
If there is interest, their reasons for investing are analyzed, and an explanation of their investment capacity is requested. If they are not interested, we also ask why, as this will give us clues as to whether we are approaching the search for investors correctly.
If their response is positive, a confidentiality agreement is sent to you, guaranteeing the proper use of the information to be provided by the recipient.
This stage is slow due to the professional nature and lack of time for discussions and the significant follow-up effort required to get a personal interview with them. One reason for having advisors is that they free up the seller’s workload by taking care of the sales process themselves.
Once the signed confidentiality letter has arrived, and we want to move forward, we arrange a meeting for the delivery and presentation of the sales booklet.
For potential, foreign buyers, we contact them directly. However, we will also provide a blind profile of the company that we are selling to investment banks. Furthermore, we also have relationships within other countries to identify other companies or investors in their areas that we have missed.
The advisory team’s mission is to research potential investors and what their track record has been in other acquisitions: prices, multiples, payment formulas, as well as understanding the strategic rationale for how this acquisition would fit their growth process. It is also essential to answer the following questions: How has their company developed this year? What has been their trajectory and history? In which geographical areas are they present? Who are their customers and suppliers? What is their growth strategy? Knowing how to answer these questions will give us the advantage of being able to improve exposure.
Investors for each stage of a company
Suppose you, as an entrepreneur, are looking for investors. You will need to approach different types of investors depending on your company’s stage of development, as shown in the following image.
Seed capital:
Seed capital consists of betting on a business idea when there is not yet a business structure. The idea of a new company is the result of an entrepreneur’s fascination, concern or obsession. The usual way to raise capital at this early stage of a new business project is to rely on family and friends. People who trust the founders, who believe in their ability to take their idea forward and are willing to support them and are aware that it is tough to find an investor.
Start-up:
Start-ups are companies that are starting to function, taking shape and attracting their first customers. In many cases, the founders have put in everything they have, the company is growing, and everyone is demanding more investment. The founders do not have the resources to finance the company’s growth; they have no support from financial institutions as they have no way of providing guarantees and they need investors to put up the money. Otherwise, the company will not be able to continue to grow.
In this situation, when the project is robust and well-executed, new types of investor may appear:
Business Angels: Figures with an increasing presence in our country, usually a former entrepreneur or a private investor committed to investing in start-up business projects, with contributions of between 200,000 and one million euros. The business angel has the scope to achieve a higher degree of diversification with their equity by participating in different projects. In turn, it helps entrepreneurs to have access to a larger pool of funds for growth.
Pledge funds: These consist of a group of professional investment experts that bring together a few entrepreneurs in an investors’ club. They pay a fee to the club, and the professionals identify and select exciting investment projects.
Capital development
For a company to pass the start-up stage, at least three years must have passed since its foundation.
The company is now already a reality, as there is a growing business structure. Most commonly, at this stage companies generate less cash than they need to finance their growth. This is a natural phenomenon because companies first have to pay money to source products. To recoup the investment, they will have to sell them and wait to cash out, so the more they grow, the more they have to spend first.
If you do not find investors, your success will be the death of you.
This is particularly serious for companies with a low profit-to-sales ratio, as profits do not cover the funds needed to finance growth, and the more the company grows, the more the cash flow is depleted. If they want to continue to grow, they need investors.
Family office
It is an office created for the comprehensive management of a family’s wealth: this office takes care of its financial, real estate and business investments, its taxation, its succession, and its general financial planning.
Family groups that have sold companies will be looking to invest in other companies to benefit from reinvestment deductions. If a company has made capital gains on divestment, it will tax at 30% (general corporate tax rate). However, it can reduce this taxation to only 18% (saving tax on 12% of the capital gain) if it reinvests during the following three years in a company, purchasing a stake of more than 5%. This tax opportunity is a clear incentive for family offices to invest in other companies.
Leveraged transactions on mature companies
During this stage of the company’s life, growth is less pronounced. It is entering a phase of maturity, where it can even comfortably pay out dividends, with stable earnings generation.
At this stage, private equity funds specializing in debt buyouts appear as potential buyers or investors. These are funds that take advantage of the ability to leverage (also called leveraging) the company to offer a higher price to the seller.
Companies that generate stable profits and have little debt are of interest to these funds, as they will use debt as leverage to buy.
They try to put little capital and a lot of debt into the operation by offering as collateral for the banks the future cash flows that the acquired company will bring in. Predictable and recurrent flows are necessary for the bank to lend more money.
NEWCOs (New Company) facilitate purchasing operations.
The importance of having a business structure
The company does not necessarily have to have a closure stage. Once we reach the maturity phase, we must structure it for continuity over time. To sell a company, it needs to have a business structure that allows it to be independent of its owner.
The company must have a life of its own. The founder or owner should be, albeit important, a passenger in the company. Only then does a sale to another group of companies or a management team accompanied by a private equity firm make sense.
This is relevant because, in many cases, the entrepreneur is the company. When they want to sell it, they do not realize that the company is worthless without them, because the entrepreneur themself plays such an important role that they take away the value by leaving.
When this occurs, there are two alternatives if the owner wants to leave the business and give it continuity. Either prepare the company for sale by providing it with a corporate structure or break it up by selling it in parts (machines, warehouses, stock, etc.) and terminating or indemnifying the contracts you have, whether they are labour or business contracts.
About ONEtoONE
At ONEtoONE, we are experts in finding national and international investors, and we know how to locate your best partner. Our investor search team, supported by the best and most comprehensive international databases and analytical capabilities, can identify and contact more than 300 investors worldwide on each transaction. We focus on your company by understanding the aspects that will help you maximize the deal’s price, once we locate those investors with whom you are most comfortable and who best value your company’s potential.
After the arrival of Covid-19, global energy demand in the first quarter of 2020 decreased by 3.8% relative to that of 2019, and global energy demand was set to drop by 5% in total for 2020.
As countries entered into lockdowns and global economic activity slowed, it was coal and oil demand that took the biggest hits, falling nearly 7% and 8.5% respectively from their 2019 levels.
In this scenario, renewable energies were the only energy source to not experience a decrease in global demand in 2020, as the rest of the energy industry struggled with the consequences of Covid-19.
Solar energy generation is by far the fastest-growing energy source, with just under 100,000MW capacity added last year alone, yet it currently only contributes 2% of global energy.
The Levelized Cost of Energy (LCOE), the average cost of generating electricity in a plant over its lifetime, for solar energy has plummeted 82% since 2010 and is one of the lowest generation source (together with onshore wind) far below natural gas, wind offshore, geothermal and nuclear.
The high reliability of photovoltaic (PV) technology and the expected long-term increase in the use of solar resources points to a bright future for solar energy and raises expectations for a return on investment in this booming industry.
Solar Energy Technological Developments
The main reason for the explosion in popularity of solar energy is that the associated costs have fallen drastically over the past few years. Between 2010 and 2019, the global weighted average LCOE of a utility-scale solar plant declined by 82%. As a result, the global average cost of solar energy generation has fallen from $0.378/kWh to $0.068/kWh.
The development of a new technology has undoubtedly contributed to this: Bifacial Module Technology.
Bifacial Module Technology
Bifacial module technology has actually been around since the 1960s, however it has only recently become a viable technology thanks to other, new technological advancements. Bifacial solar modules, unlike most mainstream modules currently, can generate power on both the front and the back sides of a solar panel, improving the energy yield by 10-30% depending on other factors such as location.
Although this technology is still fairly uncommon in the industry at the moment, its market share was less than 5% in 2017, it is widely expected to be an industry-disrupting technology over the next decade or so. An estimate from the International Technology Roadmap for Photovoltaic (ITRVP) predicts that bifacial modules will represent just under 40% of the market by 2028.
Bifacial module technology, the technology which enables a solar panel to use both sides of its face for energy generation, is expected to become mainstream over the next decade and can boost energy yield by 10-30%.
Hybridization of solar energy with other sources of green energy promises great potential in the coming years. Green hydrogen energy will improve energy storage, as battery performance will improve while costs will trend downwards. This will allow the adoption of energy into the grid according to demand.
Electricity storage will play a crucial role in enabling the next phase of the energy transition. Along with boosting solar and wind power generation, it will allow fast decarbonization in key segments of the energy market.
Reasons for optimism and high profitability of investments in Solar Energy
Solar generation is the most rapid power generation source worldwide and is where the largest investments in the industry will be concentrated in the next 10-20 years, due to the low barriers and cost-efficiency.
This is because investment assets in this area, such as a solar generation plant financed through a PPA (Power Purchase Agreement), can become fixed-income assets with very low risk.
Market sentiment expects the solar energy industry to continue growing strongly over the next few years, as there is a new wave of companies looking for high growth opportunities backed by venture capitalists. Therefore from 2022 to 2027, we can expect another rise in M&A deals.
The expected increase of renewable energies
Looking towards the future, global energy consumption is expected to have increased by a total of 23% by 2040 to around 17,500Mtoe. There is a stark regional contrast here; the energy consumption of Africa, Asia & Latin America is predicted to increase by 74%, 39%, and 44% respectively, while Europe and North America’s consumption is expected to decrease by 11% and 8%. A decline in population and improved energy efficiency are the reasons behind the drops in the US and Europe.
It is widely accepted that it will be predominantly renewable energy sources that will support increased global energy consumption in the future. Some reports (such as one from the International Energy Agency) state that 90% of all new electricity generation will be renewable. It is estimated that renewable energy sources will generate over 50% of global energy by 2035. This renewable energy charge will be led by solar energy, which is predicted to contribute almost 50% of total renewable energy generation growth within the next 4 years.
Whether all of these predictions will be met depends significantly on global environmental policy, but with the US set to rejoin the Paris climate agreement and environmental awareness at the top of the agenda across the globe, these predictions are certainly feasible.
Japan and South Korea have both recently announced their target for reaching net zero emissions by 2050, and China by 2060, while other countries such as the UK, France, and Sweden have also set legally binding targets for zero net emissions. The EU has established several climate-related goals to be met by 2030. They include a minimum 32% share for renewable energy, at least a 40% reduction in greenhouse gas emissions, and at least a 32.5% improvement in energy efficiency.
These targets are expected to boost the renewable energy surge over the next few decades.
With this in mind, renewal energies in general, and the solar energy industry in particular, are expected to continue growing strongly over the next few years, leading to a rise in M&A deals.
If you are interested in knowing more about this promising sector and its opportunities for M&A, please read our Solar Energy 2021 Outlook.
If you own a company and you are thinking of selling it, you may have wondered whether you can face the process on your own. Who can you trust? Where can you seek advice? Who can you rely on? Is it worth investing in giving exclusivity to an advisor for the sale of your company?
Below, we are going to explain why it is necessary to have a professional advisor for sell-side and buy-side advisory, and how the exclusivity you grant them will drastically influence the sale time of your company and, above all, the price you will obtain for it.
Exclusivity is giving a single advisor – or a single advisory firm – exclusive control over the negotiation, the search for potential buyers, and the overall process of selling a company.
Within the world of commercial sell-side and buy-side advisory, there are different types of advisors. You can find either brokers or professional advisors.
Brokers
A broker is a person you hire to sell your business in exchange for a percentage of your business. In this case, you will not give any exclusivity and the process will not be confidential. The broker will spread the word that your company is being sold because that is what you have commissioned them to do, and very quickly the whole market will know about it.
You may even think that by having more than one broker you will get more and better offers, but this is a serious mistake. Two brokers may claim that they have found the buyer, creating an unresolvable conflict.
The broker is in charge of indiscriminately launching the sale offer to the market. They are dedicated to the search for a buyer, and they will find one, but not necessarily the best one or the one who can pay the most for your company. It is in the broker’s interest that the transaction proceeds as quickly as possible so they can collect their percentage.
Remember that a broker will look after their profit more than yours.
Professional advisors in sell-side and buy-side advisory of companies
Professional advisors bring enormous added value that directly benefits you in the sale of your company. They carry out a properly planned, organized, and structured operation from start to finish, with confidentiality assured.
Granting them exclusivity means that they contact not the first buyer that comes along, but those who are interested in buying your company and can pay the best price, while assuring you that they can afford to pay. A professional advisor has the necessary knowledge to recommend to you not to sell at a certain moment if they believe that the offer is insufficient and that they can obtain a higher price.
Their mission is to protect the business owner and prevent the possible loss of value of the company during the sale process, which can happen if the sale process is disclosed indiscriminately. A professional Advisor will ensure complete confidentiality, as this can have a positive impact on the final sale price.
Likewise, an Advisor will not contact anyone you do not want them to. A broker cannot guarantee that, as their offer is indiscriminate.
A professional advisor will always try to get the best price for the sale of your company, even if that means waiting for the right offer.
The importance of confidentiality in the sale of a company
As we have said, granting exclusivity to an advisory firm has a major benefit for you: it guarantees confidentiality.
But why is confidentiality so important? For the simple reason that if word gets out that the company is being sold, it could reduce its value, which will hurt the final sale price. You may also not want your competitors to know about the sale of your company.
If you do not grant exclusivity you cannot enjoy confidentiality, as you cannot expect several brokers to compete to find a buyer and at the same time do so confidentially.
The confidentiality of your advisory team is guaranteed through the signing of a Non-Disclosure Agreement (NDA).
If you are interested in finding out more about the processes advisers use to ensure confidentiality, you can read our article:Confidentiality in the sale of a company.
The benefits and value of having an advisor in the sale of your business
Once you have contracted a firm specializing in the sale of businesses, they will assign a team of between four and six people to the sale of your company. This team could be bigger if the process is carried out at an international level and the firm utilises offices in other countries.
This is where you will see the value of giving exclusivity to an advisor and the time they dedicate to:
Carry out a company analysis.
Prepare documentation: information memorandums, blind teasers…
Carry out a company valuation.
Conduct a database and market analysis.
Find companies across the world that could have synergies with yours. This involves analyzing their financial statements and past acquisitions.
Discard those that don’t fit: Determine the decision-makers in those corporations and find their contact details, a job that takes hundreds of hours.
Contacts: The heads of the businesses interested in purchasing your company are contacted, the opportunity is explained to them and they are sent all the necessary documentation: blind teaser, NDA and Information Memorandum.
Negotiation: Here begin the requests for a host of information about your company in all different formats, a cross-checking of data, meetings, and visits that can last for weeks and culminate in an Indicative Offer. This process is repeated depending on the number of companies being dealt with.
We are still at the halfway point and the advisory team will have committed more than 1000 hours of work across analysts, managers, database teams, search teams, directors, and partners. At least 50% of the work remains until the transaction is closed.
The sales process can take time and the end of the operation comes with the closing of the transaction.
Professional advice on the sale of your company
A professional firm specializing in sell-side and buy-side advisory, with trained and experienced advisors, cannot take on the project of selling your company and making such an investment into it without a reasonable expectation of getting paid for it.
For your professional advisor, your profit on the sale of your company is their profit. Their incentive is that the more you earn, the more they earn.
To ensure this optimal outcome, all serious advisors require a period of exclusivity. In return, they will work with the tireless commitment of their teams of experts in accounting, finance, negotiation, strategy, legal, and tax, including advisors across international offices.
All this dedication deserves your loyalty to your advisors in return, and your relationship with them should be based on trust and transparency. They will work exclusively for you so that you get the maximum benefit. 90% of their remuneration will come from the closing of the transaction, so maintaining a relationship of trust and reciprocity until the closing of the sale is vital, both for your interests and theirs.
Avoid risks by relying on professional advisors who specialize in sell-side and buy-side advisory.
If you are considering the sale of your company, the best option is to give exclusivity to an advisor with real experience and work with them professionally.
They will help you prepare the company for sale, decide on the best way to approach and which candidates to contact. They will devise the best strategy for your interests: taking the process seriously, preparing robust documentation, valuing the company, identifying which companies are likely to be interested in your company, and finding the ones that can pay the most.
Only professional advisors can create a competitive process and negotiate the different offers for the sale of your company, guaranteeing you the best result.
Giving exclusivity to an advisor who works for you as part of your team, and has commitment on both sides, prevents you from making mistakes, substantially increasing the chances of selling the company and getting you a much higher price.
When you start the process of selling your company, you may encounter brokers who will tell you that they can work with you on a non-exclusive, success-only basis and that you will only pay them if they succeed in selling the company. This is a serious risk. This type of broker will work only to get the deal done at whatever price, as quickly as possible.
You will sell your company only once. With patience and the best professional advice, you can turn that transaction into the reward for a lifetime of job and wealth creation.
Are you thinking of selling your company? Are you prepared enough to avoid making any of the possible mistakes? Do you know how to manage them?
When it comes to selling a company, it is always important to put aside personal interests, since these can affect business development. We are talking about a complex process that requires appropriate advice that conveys trust, transparency and confidentiality.
The sale and purchase of companies is a lengthy procedure where you can easily make mistakes that can lead to the process’ failure.
To try to avoid this, in this article, we discuss the 10 mistakes you should never make if you want the sale of your company to be a success:
1. Failure to carry out a reliable valuation of your company
You cannot start selling your company without knowing how much your company is really worth, as you will not be able to reasonably argue the price to your potential buyers. You could be asking for a price beyond your means, or you could be unaware that your company’s real value is higher than what you are asking for.
In the following article, we would like to explain the keys to this activity and the most common valuation methods used in the market, to encourage you to carry out this important process in the most professional way possible.
2. During the sales process, changing the interests or motivations for which you have decided to sell
A good seller has to reflect beforehand on why they want to sell their company, and what they want to do after selling it. If you are not clear on this, it can be detrimental when it comes to selling your company, as the buyer may notice strange things in your attitude and become concerned. They may also interpret your insecurity as insincerity, and the buyer may start to doubt you and your company. This triggers the perception of risk and inevitably lowers the value they see in your company.
3. Negotiating with a single buyer
When you negotiate with a single buyer and they find out, they may take advantage of the situation. They will start to play with time, drag out deadlines and ask for more and more concessions.
The search for the best buyer and a good negotiation are key elements for a successful sale that reflect the business owner’s effort and work. It is not only necessary to find a concrete offer but also a buyer who transmits confidence and peace of mind to the entrepreneur.
Therefore, it is essential not to make the mistake of selling the company to the first company or investor that makes an offer. The business owner should not make this decision without a thorough search and analysis of all possible offers and opportunities.
Finding the right buyer for a company is often a complex, time-consuming and frustrating process. It is, therefore, essential to answer the following questions:
What are the different types of buyers?
How do you know if a company is likely to be of interest to a buyer?
How do you find the ideal buyer?
We invite you to find out more about finding the best offer and counterpart in this article.
4. Failure to manage the process with confidentiality
The sale of a company has to be a confidential process in which the business owner, accompanied by financial advisors, shows the company only to those who have a real interest and capacity to buy the company. Therefore, you should not give the sale of your company to several intermediaries as it will be challenging to maintain the confidentiality of the sale process.
You should be accompanied by an advisor, and only one advisor, during the whole process, who will work with you and take care of confidentiality. Otherwise, after a year the whole market will know that your company is for sale.
Also, the fact that it has not been sold will create a negative perception of your company. Rumours and uncertainty may increase, which would lead to the market saying that your company has been for sale for a long time because it has problems, which in turn would result in the value of your company starting to fall. Company sales processes need to be fast and targeted at genuinely interested investors.
Lack of confidentiality may cause the buyer to abandon the purchase operation and generate an absolute lack of confidence in the market about your company’s future.
It is essential to know how to correctly manage two critical aspects of handling confidentiality when selling a company.
In the internal environment, we find that many business owners make the mistake of communicating this decision to their staff or their close circle without taking the necessary care. When this happens, the likelihood of losing competitive strength increases, talented employees feel a lack of drive and look for other career opportunities, and the situation snowballs into more serious consequences such as the closure of what could have been a magnificent organisation.
It is, therefore, imperative that the employer communicates this to the right people at the right time. A positive attitude must also be maintained within the company independent of the intention to sell. This will keep your employees happy despite the change, and if the profitability of the company is maintained, the organisation will be easier to sell.
5. Dealing with the process alone, and not hiring consultants
The sales process takes many hours and a lot of work. During this process, you must focus on taking the right steps to improve your company to be ready at the time of sale. Suppose you go into the transaction without advisors. It will be very difficult to maintain confidentiality, carry out a rigorous search to find the best buyer, and at the same time, take those improvement measures.
Don’t do it alone! Buyers bring in very experienced advisors. Use professional advisors yourself: there are many pitfalls in the process of selling a company!
We remember a client whose buyer was pressuring them to sign an offer with a price, but the offer they had been made was on the company’s value and not on the value of the shares. The company’s debt had to be subtracted from the company’s value and once it was removed, the value of the shares was very low. If our client had agreed to sign such a deal without understanding the difference between the value of the company and the value of the shares, they would have committed themself exclusively to an unsuitable buyer who had also put in place a penalty clause in case our client left the negotiations, which would have trapped them in a very complicated sale.
Consultants know this and can help you avoid these traps – count on them, trust them and do not let the buyer cheat you! Often, the buyer will want your advisors to be absent, and they will tell you that it is better not to talk to them because all they do is make the process more difficult. Advisors only bring problems to lousy transaction processes, and they help improve these processes, defending and protecting your interests during the negotiation of a company’s sale. They have experience in this because they have been involved in many prior transactions.
Therefore, it is essential to use advisors who have real experience, not intermediaries, and who are professionals in financial and corporate operations. Selling a company is a very complex process in which there are many elements to watch out for and manage. Never put yourself in the hands of intermediaries; put yourself in the hands of advisors!
There is a wide range of “Advisors” from facilitators, brokers and consultants to auditors, lawyers etc. that are likely to appear in a transaction. But because they do not have a profile suited to the dynamics of a business transaction, many transactions have turned out to be unviable. This process requires very detailed and specific knowledge of techniques and dynamics that only financial advisors dedicated to companies’ sales and purchases can handle.
For this reason, when you think of advisors, you should look for those where the nature of their service is in line with their profession. In this instance, the best advisor profile is those who are specifically dedicated to the sale and purchase of companies.
6. Neglecting the business during the sale
As we have already mentioned, the process of selling a company is a long process that requires a lot of effort, so the fact that an entrepreneur would undertake this task alone is madness.
7. Focusing the operation locally
The second main mistake in selling a company is to only focus on selling the company locally. The best buyer is probably not in your country and probably not in your area. The best buyer for your company may be in another country.
You have to take a broad approach; you have created a lot of value over many years and it doesn’t make sense to mis-sell or sell the company quickly to the first individual who shows interest or to the first one who comes up with some money.
Look for somebody with the best fit, and the best ability within that fit to pay your company’s real value.It is unlikely that the potential buyers in the area will happen to be the ones who will create the most value for your company, nor the ones who will pay the most for it.
8. Failure to consider, where appropriate, that there are other minority shareholders (probably with different motivations or particular interests)
All shareholders must agree with the company’s sale; otherwise, the sale operation may be jeopardised, and all the effort and costs invested may have been wasted. They must be involved in everything that affects the company.
9. Wanting to sell in a hurry
Every day we see in our daily lives that when we do something in a hurry, things end up going wrong, and we lose time that we will never get back. The same thing happens with your company’s sale; wanting to sell as soon as possible weakens your negotiating position and your search for the best buyer. Your buyer will notice the rush; it will make them lose confidence and will give them weapons to press their demands.
10. Not planning the process
The sales process must always be planned. Otherwise, you can lose value at every stage. Disorder only brings risks and surprises that lower the company’s value, lengthen the process and the complexity of selling your company, and greatly increase the possibility of failure.
If you are considering selling your company, you will have to go through different stages that will help you maximise the final price. Do you know what they are? Download the eBook “HOW TO MAXIMISE THE PRICE OF YOUR COMPANY” where, in a simple way, we explain how to prepare the company for its sale.
Due to the complexity of the process, the delicacy of what is at stake and the specific dynamics that a corporate operation requires, the recommendation is to continue with this process in the hands of a team of professional advisors whose experience and track record overcome these main barriers. So, if you are interested in selling your company, contact us, and we will help you.
The desire to sell a company can come about for various reasons. For example, the desire to embark on another adventure, the feeling that “you’ve done it all”, tiredness of a long and exhausting professional career etc. Remember that the process of selling a company starts from the moment the entrepreneur first considers the idea. To avoid making mistakes, the support of highly professional advisors with a high level of transparency and a successful track record in past corporate transactions is essential.
You should pay close attention not to make any of these mistakes. It is very beneficial to have expert advisors such as our ONEtoONE Corporate Finance team during the process to have a successful sale.
At ONEtoONE ,we have extensive knowledge of the sector and the activities of buying and selling companies as we have participated in more than 1,000 mandates. We could give you our opinion on value ranges and many other aspects of a potential corporate transaction. If you need advice or are interested in buying and selling companies, please contact us.
Confidentiality. This is perhaps one of the first words spoken in a conversation between an entrepreneur who has decided to sell their company and those to whom the decision is revealed, including the advisors in the transaction process. You are not wrong to demand confidentiality, as this is key to the success of the operation.
Throughout this article, we will explain why confidentiality is essential, the role it plays at each stage of the process, and how to enforce it.
Why is confidentiality necessary? Should I tell my workers that I am selling?
Confidentiality is undoubtedly the cornerstone of any company purchase or sale transaction. Therefore, in any corporate operation, the confidentiality agreement (NDA) must start from the first moment, even when the entrepreneur has the idea in their head but has not yet decided to carry it out. If you follow this recommendation now, you will save yourself more of an upset in the future.
It is appropriate to inform the key people who will participate in the process that the company is for sale, by supplying them with information (usually the CFO) and asking them to keep it secret through a confidentiality agreement. With this transparency and gesture of trust, you avoid suspicions arising when asking them for information, reducing the likelihood they mention it to their colleagues. Normally, they will repay the trust you have shown them. It would be best if you did not discuss it with anyone else.
Confidentiality allows the parties involved (advisors, buyers, sellers, etc.) to share information in the transaction without any external agent discovering it. The mechanism that guarantees confidentiality in this type of operation is known as a Non-Disclosure Agreement (NDA). Previously, potential buyers who have been qualified to carry out the transaction, having a strategic fit and sufficient resources, have been provided with a blind profile and have shown interest in moving forward with the potential purchase.
At ONEtoONE Corporate Finance, when we deal with potential buyers, we only do so with large international groups with professional teams specialized in corporate transactions that are very clear on the importance of confidentiality.
Compliance with the NDA implies the non-disclosure of the information received (transmitted and perceived by observation). You should bear in mind that maintaining confidentiality is an essential tool, especially nowadays, due to the role played by new technologies making information much more accessible and immediate.
The signing of an NDA obliges the parties to monitor compliance with a series of obligations concerning the information transmitted, not only at present but also in the future. Non-compliance by any one of the parties can negatively affect the operation’s development and closure.
But what happens if the information is leaked?
Transaction price variation: How many times have we seen how a rumour in the market can change the price of a share, in one sense or another, brushing aside the initial, defined strategy and sometimes even forcing the parties to abandon the closing of the deal.
The exit of key professionals from the organization: The management team and key people in an organizational structure may feel threatened by the proposed transaction long before the new partners arrive and explain their new intentions. Losing these professionals can be disastrous for the operation, as the buyer may back out or lower the price due to the loss of value implied by the loss of key people for the company.
It would be best if you put in place means to prevent managers from leaving during the negotiation phases.
One measure we have applied on occasion with the business owner has been to inform critical managers of the idea of a sale in two years and reward them with a percentage of the transaction’s value, encouraging them to work together to improve financial ratios during this period.
Other times, we define a price that we consider reasonable with the employer and indicate to the managers that they will receive a percentage of the increase on that price. Therefore, they see a clear benefit in making a significant effort for the company, since they become businessowners, to a certain extent, and we guarantee that they do not leave you by surprise before the deal is finalized.
Confusion in the workforce: From the beginning, rumours of a new shareholder can generate nervousness among employees, directly affecting their work performance and, therefore, the company’s financial results.
Concerns of customers, suppliers: News of a new shareholder situation may cause uncertainty for customers, as they do not know whether they will be able to continue to count on the company’s products and services under the same conditions, or for suppliers, as they do not know whether they will be able to rely on the approval of the new owners.
Without M&A advisors, it is tough to maintain confidentiality and to carry out a rigorous search process for the best buyer. If you do not give exclusivity as advisors to a firm specializing in companies’ sales, do not expect confidentiality either, because you cannot expect two advisers to compete to find a buyer and at the same time do it confidentially.
Managing confidentiality during a purchase and sale transaction
Managing confidentiality is a crucial aspect of a transaction of this type. The first people to be required to maintain confidentiality are the advisors themselves, even before signing a mandate with them to sell your company. In our work as advisors in corporate transactions, we usually send potential clients a confidentiality agreement in which we undertake not to disclose any of the information provided to us regardless of the subsequent signing or not of a mandate (advisory contract).
If you are considering the sale of your company and are contacting different advisers, do not hesitate to request this confidentiality agreement to safeguard your sensitive information and the future operation.
Focusing on the buying and selling process, sellers usually look for higher confidentiality levels, but this depends on many factors and can vary.
For example, if the seller wants a high level of confidentiality, they must reduce the number of potential buyers they reach, which will slow down the sales process. On the other hand, if the seller is looking for faster results, they must broaden the potential buyers’ selection, making it more difficult to control the confidentiality factor. This may seem like a conflicting contradiction to any seller.
It is possible to utilise different techniques during the buying and selling process to increase confidentiality, but many business owners are not even aware of them. Here are some of these techniques:
The creation of a Blind Teaser: This document is designed to protect the company’s identity from being revealed when presented to potential investors. The teaser reveals the company’s status, but not its name. If buyers show interest, a confidentiality agreement is signed to protect their identity.
The signing of an NDA: Confidentiality is crucial from the first day. There will be many agents involved in the process. Everyone exposed to this information must sign an NDA so that the idea and intent are protected and secure.
Letter of Intent (LoI): This is a document in which the buyer and seller put in writing the main points of the agreement they have reached. This text must include all relevant details: whether the transaction involves a capital increase, purchase of assets and liabilities (and which assets and liabilities, if any). This text should also include information about shares, the price, the percentage to buy, the methods of payment that you will use, the payment deadlines, price adjustment formulas and other types of remuneration. The confidentiality of the agreement and a period of exclusivity (in which the seller cannot negotiate with other buyers) are also agreed upon while the Due diligence and the purchase and sale contract are being developed.
Data Room: If a deal has reached the point where a Data Room needs to be created, it means that we are close to closing the deal. In other words, we are at a sensitive point where confidentiality is vital. That is why the Data Room is designed to protect the information. They create a virtual space where the seller will hand over all the necessary documentation to the potential buyer, to proceed with the transaction. Information delivery is done through online software that prevents printing the contained documentation, avoiding uncontrolled data leaks.
What is the Virtual Data Room?
A Virtual Data Room (VDR) is a virtual space where the seller uploads all the necessary company documentation so that the buyer can have access to it and move forward with the process. This information transaction is extremely sensitive and should only be done when there is a reliable and trusting relationship between both parties, which means that there is already a willingness to invest and close a transaction.
This information transaction is carried out through a software designed to avoid any revelation of documents and to keep all the uploaded documents safe. The software must be a high-quality product that provides confidence, security and safety to both parties involved in the operation.
Imagine how difficult it could be for a business owner to expose the essence of his company. Aside from the emotional factors that make this operation difficult, this part of the process must meet all the requirements to guarantee security and peace of mind between the parties.
At ONEtoONE, we are known for transparency, confidentiality, and professionalism with how we handle our clients’ transactions. One of our best allies is the trust we generate through our work. Therefore, we encourage you to contact us if you are looking for advice on your company’s sale/purchase. And remember, confidentiality is the key to success.
After having decided to sell your company, one of the first questions that will arise will be: How long does it take to sell a business?
There is no standard answer to this question, it depends on the complexity of the operation, and in turn, on the size and circumstances of the company to be sold. But generally speaking, the sale of a company takes from 9 to 12 months to complete. In some cases, it can take up to 18.
Time is money, and in the case of a company, quite literally. The key to maximizing the value of our company during the sale will be determined by knowing where our time and money are in this process.
There are several reasons that justify the investment of time in this operation. If you want to realise a sale with all the value obtained in a long life of wealth creation, the first and best strategic decision is to invest in hiring specialized advisers.
Selling a business is a complex process. For the seller, it is the most crucial decision of their life. Considering that it is a process that they will go through only once in their life, it is normal that the preparation for this decision brings time for reflection and analysis. The seller can make errors of judgment forced by emergencies, such as health problems. Even in that case, having a trusted advisor allows you to face your personal reality with the peace of mind of knowing that your company’s sale is in good hands, without having to accept the first offer that is presented to you. A good advisor can also help you identify the best time to sell your company.
If the company also has several shareholders, imagine the time it takes to reach an agreement between all of them about the sale’s objectives.
The buyer needs to check and ensure that the value of his purchase is real. When it comes to investing our money, rushing is never good advice and preparing the necessary documentation that reflects the real value of a company requires time and professionalism.
Finally, from the point of view of the process itself, all this time is required to maximize the company’s value and carry out the unavoidable phases of a sale and purchase transaction, with all the necessary documentation and negotiations.
Doing all this while ensuring that the company does not lose value during the sale process is not an easy task.
And here another question comes as a surprise: can my company lose value during all that time? The answer is, sadly, yes. The sale is a very long process, and if the seller dedicates themself exclusively to this process, they may lose contact with the company. That makes its results decrease and, therefore, its value. As an entrepreneur, the time you dedicate exclusively to the sale of the company will reduce its value and the possibility of profiting from the sale.
The best way to spend your time as an entrepreneur during the sale of your company is to dedicate yourself to it until the process is complete. It is your best contribution to the process, leaving the fieldwork to professional advisers and supervising them.
Time frames for the phases of the sale
We arrive at the sale process itself, the hard work of analysis, search for buyers, negotiation, preparation of documentation, and closing agreements. Doing all this work effectively requires a considerable investment of time and affects how long it can take to sell a business.
Below, we outline the steps so that you can get an idea of the approximate time invested in each of them:
1. Analysis phase of the company and the operation
In this first phase, you have to reach an agreement with shareholders and prepare the company for a sale. Two documents are prepared: the blind profile and the company’s sales notebook.
The sales notebook must reflect the reality of the company and its most positive aspects, so that potential investors have the necessary information to assess the purchase.
Once the analyst team has all the information about the company, they can prepare the sales notebook in 1 month.
2. Phase of preparation of the Valuation Report and search for candidates
The Valuation Report helps the seller know their company’s value and can take 1 month to prepare.
Regarding the search and screening of candidates, it is one of the most difficult phases and requires a greater investment of time.
Being able to filter up to 700 applications, this phase can last up to 1 month.
3. Investor Search Phase and project presentation
This phase is time-consuming in assessing the interest of all potential buyers. For each selected application, you must find the appropriate contact, send each of them the teaser of the operation, as well as a confidentiality agreement (NDA). The objective is that each one returns the signed NDA, so that the company’s Information Memorandum can be sent to them.
Considering that you have to negotiate with many people simultaneously, and with each one in different phases, this phase can easily take 2 months.
4. Negotiation phase of the sale between buyers and sellers
In this phase, the seller and buyer finally come into contact, the necessary documentation is sent, and a period of resolution of doubts (of all kinds) is started. Until a Binding Offer materializes, a resolution usually requires many conversations: the buyer requests exhaustive information and consults with his own team and with the seller; you need full confidence in your investment. This period can last an estimated time of 2 months, depending on the agility of both parties’ responses: seller and buyer.
5. Due Diligence Phase
Due Diligence is a process of profound and professional analysis that the buyer commissions about the company for sale. The buyer wants to make sure of the value of what they are buying and contacts auditing companies and tax specialists to prepare a document that can cost between € 40,000 and € 100,000. All this searching, analysis and coordination of information delivery between the two parties can take up to 3 months.
6. Closing
And finally, like a mountaineer who believes that the ascent has finished and discovers that there is still a small mound left before he can reach the top, we arrive at the closing phase.
After the agreement, the closing requires the preparation of a Sales Contract or SPA, which a specialized commercial lawyer must prepare. The preparation and negotiation of this contract and the parallel documentation (such as shareholder agreements) can take between 1 and 2 months.
It is possible to make the time frames profitable and even shorten them
Now that you have an idea of the process and its timeframes, you will ask yourself one last question: is it possible to shorten the timescale of the sale of the company? Yes, it is possible.
The key to shortening how long it takes to sell a business is planning, with professionals who know how to provide the appropriate documentation and who have experience in negotiation. By presenting the information in an agile and clear way, fewer buyer doubts will arise, and the timeframe of sale is shortened. Additionally, advisors understand decision times and know the times of the year when activity slows down. Knowing this, they avoid unnecessarily lengthening the buying and selling process.
In the same way that you would not build a house without an architect, the recommendation is that you do not sell your business without an advisor’s help.
Conclusions
It takes a long time to sell a business, therefore investing in professional advice will save you time and will help obtain the highest possible price for your company’s sale. While it is true that time is the most valuable resource, money also matters. We can use both wisely to help you face this crucial moment in your professional life: your company’s sale.
If you are interested in considering the sale of your company and need professional advice, please contact us or fill out the following form:
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