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Economic reasons to sell a company

There are many different reasons for selling a business, 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

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Sale and purchase agreement

The sale and purchase agreement (SPA): what should it contain?

The expected last phase of an M&A process is known as the sale and purchase agreement or SPA. After the entire due diligence procedure, and when a buyer had analyzed the true state of the company for sale, it is finally time to map out the agreement and sale price of the company. Thus, this is the document that will be formalized into a public deed and ultimately presented before a notary, including all of the terms and conditions of the sale.

Most commonly, the buyer, along with their legal advisors, is in charge of preparing the first version of the contract. However, there are exceptions such as the process associated with auctions. In this case, a draft is delivered to the contestants, who will ultimately return the document with their modifications and offers.

Find out more about the documentation required during a sale here.

A great level of detail and care is required when drafting the contract of sale; a single paragraph in the contract can be the difference between a successful or failed agreement. The ideal scenario at this stage is to have an experienced advisor who has a proven track record in successfully drafting contracts for the sale of companies.

With this in mind, the contract of sale is not a simple document; in fact, it is enormously complex. The most frequent question is: what should be included in the contract? The document integrates an array of assets and liabilities, relationships, existing contracts, etc. In consequence, many entrepreneurs are overwhelmed with the sheer amount of pages contained in the first version of the document. In the article, we are covering the main parts of the contract of a business sale.

Sale and purchase agreement

What is contained in the company sale and purchase agreement?

The contract has five main parts:

  1. Description of the transaction;
  2. Terms of the agreement;
  3. Representations and warranties;
  4. Limitations on responsibility;
  5. Conditions.

1) Description of the transaction

This stage explains the type of operation, whether it is selling a business or assets. It is very important to describe the real intentions of each one of them, using a direct language, being clear and concise.

In case of a sale of assets, the relevant assets that enter the transaction and the obligations that are transferred should be detailed precisely. Likewise, it will be defined if any property that the seller habitually uses, such as a vehicle, parking space or even their home, is left out of the transaction.

If it is not a sale of assets but a sale of stocks and shares, a section that defines what exactly is being sold is incorporated (for example all the stock or only a specific amount of shares). When there are several companies and shares of companies involved, it is further clarified in detail what is within the perimeter of the transaction.

Sale and purchase agreement

2) Terms of the sale and purchase agreement

The first major area that is indicated in the document is the price, along with its corresponding conditions: payment methods, forecast or not of deferred payments, variable payments based on fulfillment of objectives, currency of payment, and circumstances that will produce adjustments in the price (since the final price will be based on the balance at the closing date of the agreement). The contract also includes the information of whether the surplus cash is part of the transaction or is taken by the seller as dividends, although it is not necessary for this particular transaction.

3) Representations and warranties of the sale and purchase agreement

On the one hand, the seller guarantees that the described circumstances of the company are accurate and correct. Some of the events that the seller has to corroborate are the following: the company belongs to the signatories and they have the authority to sell the company; the transaction does not violate any law or other previous contracts; the company holds such as the number of shares, the approval that all the financial statements are correct, all tax payments are updated, that  the company has not suffered any substantial change in its performance since the due diligence (distribution of dividends, raised salaries or newly signed contracts that could harm the buyer); copies of the bylaws are delivered to the buyer; and the company patents and trademarks are in place.

In the event of inaccuracy, incorrectness or untruthful information, the buyer of the company can be compensated for the caused damage, a contingency or a loss. For this purpose, liability warranty clauses are established. Besides, retention of part of the price or the deposit of that portion is usually introduced in a bank account called an escrow account. In other cases, a simple bank guarantee is agreed upon.

” In the event of inaccuracy, incorrectness or untruthful information, the buyer of the company can be compensated for the caused damage, a contingency or a loss. For this purpose, liability warranty clauses are established.

On the other hand, the company’s contingencies that are already included in the price are described so that (once the buyer knows these contingencies before paying the price) the seller is exonerated with respect to the damages or claims that these contingencies may cause to the buyer. In many cases, a price is put on these contingencies.

When the operation is based on the pre-closing balance sheet and the data will be adjusted after closing, the representations and warranties will most likely cover the interim period between the two balance sheets.

4) Limitations on Responsibility

Usually, there are limitations to the seller’s responsibility regarding responsibility with the Treasury, Social Security, or Third Parties. There are also time limits on liability claims, except for the cases of tax, labour, social security or administrative contingencies, where the time limit coincides with the legal prescription.

The contract usually sets a minimum amount of responsibility above which the seller’s liability can be discussed, so that the parties eliminate the possibility of any minor issues. For each transaction, depending on the size, the amount will be that in which the parties feel comfortable in structuring the agreement.

5) Conditions of the sale and purchase agreement

The conditions of the sale and purchase agreement include, among others, non-compete clauses. These clauses serve to prevent the seller from setting up a parallel company and taking customers away from you. It serves to protect the company’s goodwill.

Sometimes a contract of sale is signed conditioning the closing to the fulfillment of certain milestones such as obtaining authorisations, assignment of contracts or that the seller carries out certain operations in advance (the sale of a plot of land or its appropriate legalisation in the corresponding register).

Annexes

The annexes are a part of the contract that has a legal value. They include due diligence, financial statements, patents, certificates of compliance with Social Security, Treasury, etc.

ONEtoONE Sell-side services

Selling a company can be a frustrating and long process. The experience advisorts of ONEtoONE could guide and support you during the whole sale procedure, making the maximum value out of the firm, finding the buyer that can pay the most, wherever they are. Find out more about our sell-side services.

If you are considering to sell your company, prior to the purchase contract, you will have to go through different stages that will help you maximize the final price. These steps can be decisive for the future of the company. If you need the guidance of a reliable team during the process do not hesitate to contact us.

Download our e-book about the Sale and Purchase Agreement (SPA) to access all the necessary information


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The importance of a LOI when buying a business

The Importance of a LOI When Buying a Business

Surely you have heard of the expression “words are gone with the wind.” Keep this phrase in mind when you are planning your M&A strategy. You must understand that there is a great difference between a handshake with verbal agreement and a letter of intent. When buying a business, one must write down everything. It is necessary because throughout the conversations amongst each other ambiguities are generated. It’s called selective hearing, when one only hears and listens to what is most convenient for them.

Perhaps you did not know this but during a negotiation there are three conversations being produced: the conversation of the seller with himself, the one of the buyer with himself, and the one with each other. It happens often that when one is speaking the other is not listening because they are invested in the conversation with themselves or they are thinking of what they are going to say next. Consequently, a dialog like this is produced:

Buyer: “we agreed on this”

Seller: “we never made a deal on that”

Buyer: “but I told you and you agreed to it”

Seller: “no, we never even spoke about that”

It does not necessarily mean that the seller is a liar, he was just not listening.

This is why it is important to have your advisors write a letter of intent of everything that was agreed upon between the seller and the buyer, if possible have both parties sign the document. The letters are key to a smooth corporate operation.

The importance of LOI when buying a business

What is a LOI and why is it necessary when buying a business?

The letter of intent (LOI) is a document that is relevant during the selling of a business, due to its implied jurisdictions. This document contains the main points that have been agreed upon by the buyer and the seller.

It is of vital importance that all relevant aspects of the agreement are written down since thereafter, you, as a buyer will invest in auditors and legal advisors. If it’s the case that the most important and relevant points were not addressed in the LOI, then it is possible that the process will fall apart and everyone involved waisted their time and, in your case, a lot of money.

The agreement should include if the deal is about capital extensions, a purchase of financial assets and financial liabilities or shares, the price, percentage at purchase, what form of payment will be used, payment deadlines, adjustment formula for price and any other sort of reimbursement ( consulting fees for the buyer).

An agreement of confidentiality and a term of exclusivity (in which the seller cannot negotiate with other buyers) that proceeds with due diligence and a contract of trade. Often a deadline is placed for the signing of the contract and a calendar of financial performances.

There can be an incorporation of the type of banking debt that will be used for the purchase.

In various occasions it is established what the due diligence will cover, but of course, the seller should facilitate the information necessary for the due diligence.

In this agreement you must establish that the business will continue to be managed until the purchase in the manner established. It shall remain intact and without any alterations of significance to the working capital nor the relationship with the providers and clients; you cannot distribute dividends or make extraordinary expenses or sell financial assets; it is prohibited to sign other contracts different to those of the normal management, change salary or compensation plans etc. For this type of action, written authorization of the buyer is required.

You must condition the validity of the agreement until you are satisfied with the due diligence, to obtain the financing necessary from the banks and, of course, until there is no substantial changes in the financial or operative aspects of the company.

Moreover, it is recommended to make an agreement that states that if the seller retracts himself or leaves the sell, he should pay the expenses of the due diligence. This is crucial because the seller can become nostalgic in the final steps of the sale and cancel the process.

The LOI is what you will present to the banks so they can begin financing what was agreed upon. Do not let the “words are go with the wind,” if you truly desire to buy the business.

If you want to know more about how to do a LOI, download our EBook here.

As the days pass, the world that we take part in becomes more globalized, buying a business presents itself as a magnificent path towards new markets or to reinforce a competitive position. The biggest challenge that emerges with these opportunities is knowing how to approach them to be able to maximize profit and not be deceived. If you are planning on buying a business and you are looking for advising, do not hesitate to contact us for strategic advisory!