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  • Bartłomiej Dmitruk

How to prepare a company for sale? - a practical guide for an entrepreneur

Selling a business, when the owner plans to withdraw from the business or change his business life, requires proper and detailed preparation. The better prepared the company is for the sales process, the better the end result will be for the owner or owners. It is worth preparing well for such a process, the more so as your business is often sold once in a lifetime.


M&A - private transaction market


The Polish market of the largest M&A transactions (Mergers & Acquisitions) has approximately 230 transactions closed in 2020. These are only large and medium-sized M&A transactions monitored by advisors and M&A market analysts, such as Mergermarket or Pitchbook. They include both transactions carried out by enterprises and those carried out by Private Equity (PE) funds.


In addition to classic M&A transactions in Poland, the area of startup investments and the development of Venture Capital (VC) funds is experiencing a boom. According to the data published by PFR Ventures, in 2020 153 VC funds financed 300 companies and the VC funds themselves obtained over PLN 2.1 billion from investors.


A relatively new way of obtaining private capital from investors for various projects is crowdfunding, i.e. financing by individuals in a collective but non-public form of projects worth up to EUR 1 million. In 2020, 50 projects were financed under this formula, for which a total of PLN 77 million was collected.


In addition to the monitored part of the market, there is a wide market for sale and purchase transactions of companies from the SME sector, financing small projects that are carried out daily in free float through bilateral transactions often announced on internet portals, which have gained interest especially after the COVID-19 experience.


Company for sale and legal form


Although the sale of an enterprise is possible both in the case of sole proprietorship, civil law partnership, partnership, in practice it is definitely the easiest way to sell shares in a capital company.


For small entities, transformation into a limited liability company is definitely the most advantageous, for larger entities it is worth considering a joint-stock company. It is worth thinking about the transformation in advance in order to show the longest history of the company.


Equity companies are easier to find buyers among financial investors, such as Venture Capital and Private Equity funds. Funds purchase almost exclusively shares or stocks in capital companies.


Financial situation, market environment and development prospects of the company sold


The first thing investors usually ask is the financial statements. It is worth for the financial statements to present a reliable and clear financial and property situation of the company. The financial statements should be complete and prepared in accordance with the company's accounting policy and legal regulations. Any deviation from market standards or errors in financial statements are perceived badly by investors and consequently lower the level of confidence and the company's valuation.


In the case of financial data, investors' attention will be largely focused on revenues, profitability and the structure of business financing. Investors prefer companies whose sales are growing, and these increases are accompanied by improvement or maintenance of profitability. Investors look at how the company's results compare to similar companies in a given sector. The better they are than the competition, the greater the potential attractiveness of the company in the eyes of investors.


For potential buyers, it is also important how the company finances its operations and development, and whether the structure of debt and assets corresponds to the company's needs. Buyers will look at the extent to which and whether external capital is used effectively (loans, bonds, leasing). It should be remembered that the market valuation of a company is always adjusted for the level of debt, which in the case of companies with high indebtedness will have a significant impact on the valuation.


Another element influencing the valuation is the company's assets. Real estate as well as movable property will be assessed and valued by investors. Investors are reluctant to pay for non-business and non-money-generating assets. Intellectual property is also important, especially if it results in the company's competitive advantage. Acquisitions of companies with unique know-how, technology or brand are common in the mergers and acquisitions market, but it is worth remembering that these assets should be properly secured against sale (protection of intellectual property in the form of patents or trademarks).


Potential buyers also analyze the company's market environment and its market share. If the buyer is a strategic entity or a competitor from the industry, he understands the market environment and the specifics of his industry much better. For financial or non-industry investors, they will want to better understand the market environment, prospects and competition.


In addition to the specificity of the market, the market position of the enterprise is also important for investors. Usually, the larger the market share, the more attractive a company is to buyers, although investors also appreciate companies that operate in niche or completely new market segments.


To sum up, before selling the company, it is worth taking care of the quality and timeliness of financial statements and the results achieved. Additionally, it is worth optimizing the financing structure and selecting possible assets not related to the direct activity. At the same time, it is worth describing the market environment well, emphasizing the competitive advantages and market position. It is also worth focusing on the possibilities of further business development and prospects for the industry and the company being sold.


Team and competences


When selling a company, you need to prepare to face the topic of continuing business by the buyer. The most important element of success in the company's purchase process is the acquisition and retention of key managers and employees. In the case of large companies, the owner usually prepares to hand over the management earlier, e.g. by going to the supervisory board. In the case of small and medium-sized companies, the buyer often takes over a team of employees, reckoning with the fact that after the purchase, he becomes involved in the management of the purchased company or hires his person for management. Unfortunately, employees and management staff are often afraid of the owner change process and can use such time to change employers. When taking over a company, it is worth making sure that key people and competences from the point of view of continuation and further development of the business remain in it.


Preparation of information and documents for investors


The professional process of selling the company should be based on documents clearly and transparently presenting the company prepared for sale. Such documents will facilitate the process of searching for an investor and reaching those most interested. Often, on the basis of such documents, investors submit preliminary bids for the purchase of a company, which are clarified after conducting the due diligence process, i.e. a detailed examination of the company put up for sale.


Care should be taken to prepare transparent and aesthetic information documents, such as:


The information document (Teaser) is a document that contains basic information about the company, in particular registration and contact details, information on the subject of activity, organizational and ownership structure, basic financial figures and forecasts, key information about the market in which the company works. The information teaser is usually the so-called one-pager and it is the first document that is available to potential investors. Its purpose is to interest the investor in an investment in the company.


The Info Memo is a more detailed description of the teaser, it should contain, inter alia, a deeper description of the company and its activities, history, detailed financial data and forecasts, and market analysis. It should be a document enabling the initial valuation of the enterprise by potential buyers.


An investor presentation (Pitch Deck) is a document that contains information from an information memorandum, but in the form of a presentation. It is a document that should be used by the entrepreneur to personally present the company at the stage of meetings with potential investors.


NDA - Non-Disclosure Agreement


At the stage of initial talks with the investor, many concerns are always raised when the seller discloses sensitive information. It is difficult for entrepreneurs to agree to the disclosure of the company's internal documents until they are convinced that the investor is serious about the acquisition of shares. Particular care should be taken when the investor is an industry company or a direct competitor.


The standard solution in such a process is a Non-Disclosure Agreement (NDA). It happens, however, that the parties become so heavily involved in the NDA negotiations that they forget about the primary purpose of the process that such an agreement is to serve.


In such a situation, it is worth dividing the whole process into several stages, during which certain batches of documents will be gradually released, starting with the least sensitive ones, enabling the submission of an initial purchase offer. The most sensitive information - commercial contracts or production technology - is the data that should be disclosed at the last stage of the transaction and should confirm the accuracy of previously provided information.


Due diligence, i.e. checking the company before buying


Investors interested in acquiring the company will certainly verify the company's key documents as part of an audit called the due diligence process. Unprofessional approach and lack of preparation of the Company to this process may meet with the failure of the entire project, extend the sales process or affect the attractiveness of the submitted purchase offers.


Typically, the due diligence process takes place in a virtual data room, such as Virtual Data Room SECUDO, which allows proper preparation of documentation for buyers, proper confidentiality of the process and information provided, and communication with one or more buyers in a confidential and secure manner.


The due diligence process using VDR SECUDO has been described in detail in a separate entry on our blog: https://www.dealdone.pl/post/proces-due-diligence-z-wykorzystaniem-virtual-data-room.


In the case of selling the company to competitors, it is worth considering the so-called Vendor Due Diligence (VDD), which enables the transfer of key information necessary for the valuation and submission of a purchase offer, without disclosing sensitive information constituting a competitive advantage and trade secret. We write more about VDD in a separate entry on our blog: https://www.dealdone.pl/post/vendor-due-diligence-vdd-przygotuj-się-profesjonalnie-do-sprzedaży-firmy-w-vdr.


Business valuation


At the stage of making a decision to sell, each owner asks himself a question - how much is my company worth? The sale of the company is usually a unique and often one-time event in the life of the owner. Therefore, it is worth having a verified view on the valuation and potential value of the sale transaction. Even if the owner has an opinion on the value of his company, it is worth reaching for an objective opinion of an external expert. The process of independent valuation itself will allow the owner to better prepare for the sales process and talks with investors. It will also be a source of valuable information for the entrepreneur and may additionally make the company credible in the eyes of investors.


The valuation method should be adapted to the specifics of the business of a given company, and the assumptions adopted for the valuation consistent with the position of the management board, consistent and reliable. It is worthwhile for the company to be valued using at least two methods, e.g. the property method, income method or comparative method.


Term sheet or initial offer


After reading the information memorandum or after the initial research of the company, the investor should present a Term sheet which is a kind of initial investment offer, containing the key parameters of the future transaction and sale agreement. The term sheet is a reference point for the preparation of an investment agreement. Agreeing the term sheet at the initial stage of the transaction allows both parties to find out whether their mutual understanding of the terms of the transaction does not differ significantly from each other. This can save a lot of time and difficult negotiations. The term sheet is agreed at the stage of the process in which the investor receives the most important, but not necessarily the most sensitive information about the company. This prevents the seller from disclosing confidential information too early.


SPA, i.e. a sale-purchase agreement


The process of negotiating and developing the final content of the company's Sales-Purchase Agreement (SPA) is undoubtedly the most difficult stage of the process. Especially if on the other side of the table there is an experienced fund or an experienced large entity from the industry.


Working out a final contract for an entrepreneur, especially one who sells the company for the first time, may then turn out to be an insurmountable stage without a professional legal and / or transaction advisor.


The draft SPA agreement typically includes a number of different investor safeguard clauses and breach conditions under which the investor can limit payments for the acquired company or file a claim against the owner. Often, such an agreement specifies the conditions for further cooperation, if the owner undertakes to continue to support the management of the enterprise during the transitional period. At this stage, the seller should also protect his interests and minimize the risks after the sale of the company.


It is worth carefully analyzing the proposed provisions of the SPA agreement and taking advantage of the experience of advisors who have negotiated such agreements in similar transactions.


About us


DealDone is a specialized company that offers high-quality products in the field of information and data security. The DealDone team consists of people with many years of international experience in investment banking, investor relations, technology and cybersecurity. We offer services and software in the field of modern technologies for the circulation of confidential information, classified information, sensitive data and digitization, security, encryption and sharing of data and documents inside and outside the organization.


DealDone independently developed and introduced for sale the Virtual Data Room SECUDO solution. VDR SECUDO is a platform for secure exchange and processing of confidential information offered in the Software-as-a-Service model for business clients, in the form of virtual data rooms.

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