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Economic reasons to sell a company

There are many different economic reasons for selling a company, and each owner has his or her senses. However, the reasons can group them into three main aspects: personal, family and financial. It is usually a combination of multiple reasons, both personal and financial. At ONEtoONE Corporate Finance, we want to help you with this challenging decision. Thus, we bring you the most common reasons for selling a company. In this article, we focus on the economic part; however, if you want to know more excuses, you can download our Ebook :

The company receives an offer:

On numerous occasions, a company directly receives an offer from the buyer. Most of the time, managers doubt if it is the best option. If this happens to you, you will need good analysts to advise you.

Need for a new injection of resources:

On many occasions, companies need an increase in resources and goods. In the times we live in, everything changes very fast, and technology is increasingly advancing. For many businesses, this condition becomes unsustainable due to the need of constant investments. On these occasions, the business owners may conclude that it is better to sell the company than to continue investing in it and continue losing money.

Concentration in the sector:

When a sector tends to concentrate, it is an excellent opportunity to sell a company. In this circumstance, the business that is acquired is highly succulent for the buyer and, therefore, there is more negotiation margin and possibility of profit. We are currently experiencing a trend towards concentration in almost all sectors, especially those related to technology.

Decreasing profitability:

Sometimes a business can see its margins decrease over time. The company stagnates in a medium size in which it cannot benefit from the advantages of large companies, nor the flexibility of small ones. So, the owners may be interested in selling it to another one that can bring them more size, more profits and a reduction in costs that will increase the profitability.

Current crisis:

But if there is a situation that has put the world economy in check and has led to numerous sales, it is the current Coronavirus crisis. The pandemic has dramatically affected the business environment. That is why, as our president Enrique Quemada wrote, a large number of M&A operations are taking place daily worldwide. This situation leads to a high number of companies wanting to buy others, which means that is a great opportunity for you to sell.

Whatever your motive is, the sale of a company always ends in profit, in success.

What is the LOI and How to do it?

What is the LOI?

The‌ ‌letter‌ ‌of‌ ‌intent‌ ‌(LOI)‌ ‌is‌ ‌a‌ ‌paper ‌that‌ ‌is‌ key‌ ‌during‌ ‌the‌ M&A Process,‌ ‌it is formed by the main points of the first agreement made by the Buyer and the Seller. It will be the base of the Sale and Purchase Agreement (SPA)‌.

It‌ ‌is‌ significant ‌that‌ ‌all‌ ‌important‌ ‌aspects‌ ‌of‌ ‌the‌ ‌agreement‌ ‌are‌ ‌written‌ ‌down‌ ‌since thereafter, the Buyer ‌will‌ ‌invest‌ ‌in‌ ‌auditors‌ ‌and‌ ‌legal‌ ‌advisors.‌ In the case in which ‌the‌ ‌most important‌ ‌and‌ ‌relevant‌ ‌points‌ ‌were‌ ‌not‌ ‌addressed‌ ‌in‌ ‌the‌ ‌LOI,‌ ‌then‌ ‌it‌ ‌could be ‌possible‌ ‌that‌ the process‌ ‌can ‌fall‌ ‌apart‌ ‌and‌ ‌everyone‌ ‌involved‌ ‌wasted‌ ‌their‌ ‌time‌ ‌and,‌ ‌in‌ the purchaser case, a lot of money.

Furthermore, the‌ ‌LOI‌ ‌is‌ ‌what‌ the buyer will have to expose to the banks so that they can start financing what was agreed.

LOI Points:

Abstract: This is the introduction with the fundamental aims of the LOI.
Transactions: Simple description of the Transaction.
Timeframe for the transaction process: This point can include deadlines to keep process moving along, according to the arrangement.
Assumptions: It includes any representations made before the Closing of the Transaction which have been discussed between the Buyer and the Seller.
Conditions precedent: Detailed description of conditions for the closing.
Due Diligence: It is wise to describe in detail the areas of the company that will undergo the process.
Financing: In this part you should incorporate the type of financing that the Buyer will use to fund it.
Confidentiality: it is important to include a confidentiality clause due to the possibility that your document contains new sensitive information.
Exclusivity period: This point should be as detailed as possible.
Disclaimer of Liabilities: A brief pulled apart should be made to limit the liabilities of the Parties in the event that negotiations fall through after LOI.
Termination of LOI & Break up Fees.
Other conditions.

In collaboration with the Legal Department we have made two E-Books in which you can find the key points that should be included in the LOI (Letter Of Intent) and in the SPA (Sale and Purchase Agreement). If You want to know more, you can download our E-Book that provides detailed information about this document:

About ONEtoONE

If you are looking to optimize the value of your investment within an operation, I encourage you to evaluate ONEtoONE Corporate Finance: a firm dedicated to provide the highest value services to their clients through transparency and professionalism. For more information click the button below.

The impact of COVID-19 on business valuation – Interview with Francisco Duato, Partner of ONEtoONE Corporate Finance

Francisco Duato, Partner of ONEtoONE, interviewed for Capital & Corporate, tells what are the changes that are going to occur in the M&A sector due to the pandemic, mentioning the most affected sectors, as well as the main opportunities for investors.

The COVID-19 crisis has forced many companies to adapt to the new situation. According to Francisco, the ability for innovation and digitization make it visible which sectors can continue to be interesting for investors and which ones cannot. Although the impact of COVID-19 on the M&A sector cannot be evaluated yet, operations show falls in the price of assets, according to current data.

The impact of the crisis on valuations:

Duato first indicates that, as a consequence of the pandemic, non-essential and essential activities suffered drops that have never been seen before, negatively influencing the companies’ valuation. Besides, the advisers still do not have visibility of the evolution of prices and valuations, since all this will depend on the effect of the second wave that is beginning now and will extend into autumn.

“The entrepreneur has to do his best to preserve the value of his Company, and M&A advisors have to sharpen the imagination to transfer most of the value to the transaction price,” explains the ONEtoONE’s Partner.

The advisors’ goal is to find a reasonable and satisfactory price for the seller and the buyer as well, and in this situation after the first wave of Coronavirus, this price may vary. However, if a company’s fundamentals were good before the pandemic, and they remain so in the new scenario, this should not penalize the valuation and the company’s price.

Change in deals in the M&A sector due to the pandemic

Duato comments that depending on the sector operations will fall, and others will be redefined. In affected sectors we are going to see many mergers of companies with high operating leverage.

In our Partner’s opinion, the most difficult part of the consultants’ job today is quantifying the impact of the pandemic on the different companies. As a solution, we have to focus on the strategic sense of operations rather than finances. The strategic decisions taken from now on will affect how the company gets out of this complicated situation.

Also, if we focus on making decisions about deals that had already started before the first wave of Coronavirus, it is a legal challenge. On the one hand, buyers protect themselves with Material Adverse Change (MAC) clauses, and on the other hand, sellers want to maintain the same price before the crisis.

The new situation has changed the decision-making process of investors, Duato adds. Now, when looking for opportunities, it is essential to know which sectors are of interest in this new scenario. Furthermore, not only must we take into account in which sector the company operates, but also to whom it sells.

Which sectors will see their valuations most affected?

According to Francisco, during the pandemic, large technology companies such as Amazon, Google, Apple, and Facebook have achieved outstanding results. Technology has allowed the digitization of companies and users, which has been fundamental in this crisis.

“Technology companies that know how to do well in cybersecurity, cloud services, artificial intelligence, collaborative software, internet, health or e-commerce, among others, will be clear winners, ” Duato says.

However, the tourism sector was the clear loser in this pandemic. Despite this, companies in this sector have a high potential for recovery, and because of this, experts advise keeping these assets.

Market opportunities

“The Covid-19, among other effects, has drained the liquidity of companies. In the first instance, the CFOs have focused on preserving the cash by resorting it to officially supported financing lines, but those that have survived this first challenge are facing a new one: solvency management. “, Explains Francisco

Liquidity is the ability to meet short-term payments and is related to the proper management of cash flows. However, solvency is the ability to meet long-term payments and is related to the management of the financial structure of the company.

“The approaches tend to vary greatly depending on the size of the companies. Large companies tend to know and handle the different alternatives well. However, the Spanish SME has traditionally been financed via equity, retention of profits, and bank debt. This is an ideal moment to reopen the debate on the advisability of diversifying the sources of financing and evaluating the options available in the market based on the specific characteristics of each company. It is time to overcome the fears of opening the shareholding to investors such as private equity, which in addition to financing, provides professionalization and support in management,” reflects Francisco.

On the other hand, our Partner comments on his opinion on the role of M&A in current and future times: “As we know, seeing changes in M&A takes time and is not usually the best option when immediate problems have to be solved.” However, he indicates, “not making all these reflections on time can lead companies to situations in which the only option is to turn to opportunistic investors. With this comment I do not want to discredit the work of the funds with a distress profile, they are a good option when we are facing a special or very deteriorated situation, but avoiding reaching that point and trying to maneuver in time is a shared responsibility of the entire management team.”

At ONEtoONE Corporate Finance we have created a podcast solving the most common doubts about our company valuation service.

About ONEtoONE

If you are looking to optimize the value of your investment within an operation, I encourage you to evaluate ONEtoONE Corporate Finance: a firm dedicated to provided the highest value services to their clients through transparency and professionalism. For more information click the button below.