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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 last step of an M&A process is known as the sale and purchase agreement or SPA. It’s time to finalize the agreement and sale price of the firm once a buyer has completed the entire due diligence process and evaluated the company’s actual condition for sale. In order to include all of the terms and circumstances of the transaction, this document will be codified into a public deed and finally presented before a notary.

The buyer is often in charge of creating the initial SPA contract and their legal counsel. There are, however, some exceptions, such as how auctions operate. The participants are given a draft in this situation and will finally return it with their changes and offers.

When creating the contract of sale, excellent care and attention must be taken. A single paragraph in the contract can make the difference between a successful or failing deal. The optimum situation at this point is to get guidance from knowledgeable counsel. one has a track record of success in structuring contracts for business acquisitions. In light of this, the SPA is not a straightforward contract. In actuality, it is complicated.

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

In light of this, the contract of sale is not a straightforward document; instead, it is incredibly intricate. The most common query is: What information should be in the contract? A variety of assets and obligations, connections, current contracts, etc. are all integrated into the document. As a result, the sheer volume of pages in the first version of the document overwhelms many business owners. The critical components of the contract for a business sale are covered in this article.

What is contained in the company SPA?

1. Description of the transaction

This phase describes the transaction, such as the sale of assets or a business. It is crucial to clearly and concisely express each person’s true intentions by utilizing straightforward language.

When selling assets, it is important to be very specific about the pertinent assets that are included in the transaction and the liabilities that are transferred. It will also be specified whether any property that the seller regularly uses, like a car, a parking space, or even their home, is excluded from the sale.

If the transaction involves the sale of stocks and shares rather than assets, a section describing the specific items being sold is included (for example all the stock or only a specific number of shares). When numerous firms and shares of those companies are involved, the boundaries of the transaction are further defined in great detail.

2. Terms of the sale and purchase agreement

The price is the first significant area that is mentioned in the document, along with the conditions that go with it. These conditions include payment methods, forecasts of deferred payments, variable payments based on the achievement of goals, the payment currency, and events that will result in price adjustments (since the final price will be based on the balance at the closing date of the agreement).

Although it is not necessary for this specific transaction, the contract additionally specifies whether the surplus cash is included in the deal or given to the seller as dividends.

3. Representations and warranties of the sale and purchase agreement

On the one hand, the seller promises that the circumstances of the business as described are true and correct. The following are some of the events that the seller must vouch for:

  • The company is owned by the undersigned and they have the power to make the sale and enter into the contract.
  • They do not violate any law or other previous contracts.
  • The company has such a number of shares.
  • Copies of the articles of association have been delivered to the buyer.
  • The financial statements are correct.
  • The company has not undergone any substantial change in its operations since the due diligence.
  • All tax payments are up to date and correct.
  • You own the patents and trademarks.
  • There are no outstanding lawsuits against the company.
  • No hidden liabilities.

The damage, inconvenience, or loss caused by faulty, false, or untruthful information may be made up to the company’s buyer. This is taken into account while creating liability warranty conditions.

For the retention of a portion of the purchase price or the deposit of that portion, a bank account known as an escrow account is often formed as well. In other circumstances, a simple bank guarantee is accepted.

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.

Be mindful of the following:

  • Any other associations, relationships, or beneficiaries between the sale subject and third parties.
  • Any disputes or claims by third parties.
  • Any loans or credit on the subject of sale.
  • If a warranty is of particular importance, it may also be necessary to ask all other shareholders to make it explicitly.
  • Any conflict of interest.
  • A breach of statements made in this section will result in a breach of contract and liability for the party at fault.

4. Limitations on Responsibility

Usually, the seller’s liability for obligations to the Treasury, Social Security, or third parties is restricted. There are deadlines for filing responsibility claims, except for circumstances involving taxes, employment, social security, or administrative contingencies, where the deadlines correspond with the legal deadlines.

To prevent any minor disputes, the contract typically establishes a minimum level of responsibility over which the seller’s accountability can be discussed. The sum for each transaction will depend on its magnitude and be determined by how comfortable the parties are with the agreement’s structure.

5. Conditions of the sale and purchase agreement

Non-compete clauses are one of the terms of the sale and purchase contract. These provisions are meant to stop the seller from starting a competing business and stealing your clients. It assists in safeguarding the reputation of the business.

Sometimes, a contract of sale is made with the understanding that certain conditions must be completed before closing, such as acquiring approvals, contract assignments, or the seller performing specific tasks beforehand (the sale of a plot of land or its appropriate legalisation in the corresponding register).

6. Annexes

The contract’s annexes are a section with a legal significance. Due diligence, financial statements, patents, and certificates of compliance with the Treasury and the Social Security Administration are some of them.

ONEtoONE Sell-side services

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

If you are considering selling 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!