From the first thought of selling to the signing of the contract – key steps, pitfalls, and recommendations from the experts at Unija ETL Consulting. Every year, according to data from the European Commission, approximately 450,000 companies face a business transfer. Selling or transferring a business to another individual or legal entity allows the owner to close a chapter of their life, while giving the company an opportunity for further development.
There are many reasons why business owners decide to transfer their business. The most common include the owner’s retirement, an early exit from the business, a career change and other business ambitions, as well as common triggers stemming from unforeseen circumstances (divorce, illness, etc.). The most common methods of business transfer for both small and large companies are:
- transfer to family members,
- sale of the business to third parties (either to existing shareholders or to external parties),
- sale to other companies, including mergers with other firms, and lastly,
- liquidation of the company.
Why do entrepreneurs choose to sell their business as a form of ownership transfer?
Selling a business is the best option for ownership transfer when the owner wishes to secure funds for a financially secure life after retirement, or when the entrepreneur lacks a suitable successor to take over the company.
However, we must be aware that the process of selling a business presents a significant challenge for both. The seller and the buyer. Defining the company’s valuation is one of the most critical steps in the sale for both parties of the transaction. Despite using proven business valuation methodologies and obtaining realistic value estimates, we often see a large disparity in how the seller and the buyer perceive the company’s worth.
In addition to selling to external parties, it is always possible for the company to be taken over or bought by its employees. In the case of a sale to employees, the procedure is similar to transferring a business to a family successor. Employees are already familiar with the organizational culture and customer base. They also know the products and other key factors of the company.
The success of a business sale depends on numerous factors, with the most important being the preparation of the company for sale. This preparation phase can even take several years. The average period to secure a buyer and execute the transaction is typically between one to two years.
The Seven Key Phases of Selling a Business
The sale of a business is a demanding, multi-stage process that requires careful planning and expert management. The success of the transaction depends on how well the owner and the advisory team prepare each individual phase. Below, we present the seven key phases of a business sale, which provide a framework for a structured, transparent, and successful M&A process.
Preparation of the Company for Sale
Once the entrepreneur decides to sell their company, it is essential to consider the goals and strategy for the sale. It is extremely helpful if the owner has a clearly formulated vision, which can also serve as an additional vision for the potential buyer. Equally important is that the company has all its:
- documentation,
- finances, and
- legal and tax affairs
in order before the sale process begins. With experienced advisors by their side, the entrepreneur can more easily maintain control over the procedure and ensure the sale is conducted quickly, securely, and with the best possible outcome.
Preparation of Documentation
The second phase of the sale involves preparing documentation to present the company to potential buyers. The basic presentation documents include the Company Profile (or “teaser”) and the Information Memorandum. While the teaser is a short document containing basic company data, the Information Memorandum is a more comprehensive document covering all key important information about the company and its environment.
Analysis of Potential Buyers
The goal of this analysis is to identify potential investors and possible buyers for the company. It is important to choose the right strategy for approaching them. Sellers often find buyers for a company among competitors, suppliers, employees, or customers. The key is to prepare a thorough list of potential buyers to target with the sale; this list should not be too narrow or too broad.
Presentation of Documentation
It is crucial to sign a Non-Disclosure Agreement (NDA) with a potential buyer before disclosing any information about the company. After signing the NDA, the seller can acquaint the potential buyer with the Information Memorandum. Simultaneously, it is advisable at this stage for the company to obtain a Letter of Intent from the interested parties, thereby demonstrating their serious interest.
Negotiations
After successfully presenting the company to a potential buyer, negotiations begin. Negotiations are crucial for the successful realization of the sale. During negotiations, based on the various offers received, the focus is on defining possible payment methods, cost-sharing, tax liabilities, guarantees, and other important factors in the sale. It is also necessary to prepare everything for the due diligence review, and a document can be prepared that later serves as the basis for the main sale and purchase agreement (Memorandum of Understanding).
Transaction Closing
In the final phase, the acquirer conducts due diligence on the company. After a thorough review of the operations and the company as a whole, the transaction is completed. In this phase, the role of professional legal support is key, ensuring the transfer is executed in accordance with all agreements and that the client’s interests are properly protected. Throughout the entire sale process, it is essential for the owner to have a trustworthy team of experienced experts to ensureprocedural transparency, efficient execution, and the achievement of the most favorable sale terms.
Post-Acquisition Integration
The process of integrating the buyer into the company often begins in practice during the sale process itself, but becomes decisive after the transaction is closed. A successful short-term integration is a crucial factor for the long-term success of the company. We ensure the success of the integration by placing the employees and customers, who are most affected by the company’s processes, at the center of our attention.
The Legal Perspective of Selling a Business
The legal aspect is an integral part of the transfer of a business. With a properly prepared contract, we can protect all parties involved in the transaction and achieve potential tax advantages. For the preparation of legal documentation and advice on the effects of the contract, it is advisable to involve appropriate legal and tax advisors in the process.
In the sale itself, entrepreneurs typically choose one of two main options:
- the sale of a business share (sale of the company) or
- the sale of the company’s assets.
In a share deal, the seller is a shareholder (or partner) of the company. The buyer steps into their place as the new shareholder, which, from a legal perspective, does not affect the continuation of the company’s operations. In the case of an asset sale, the company itself, or its management acting on its behalf, is the seller. In this scenario, the buyer of the assets does not become the universal legal successor. Instead, they must enter into new contracts and obtain new permits and consents, if required, to use the assets or continue the business operations.
A sole proprietorship (s.p.) can also be sold, either as a whole or in parts.
Tax Aspects of Selling a Business
Tax implications depend on the structure of the business sale, as the tax effects (capital gains) differ depending on whether the seller is an individual or a legal entity. This influences both the determination of the tax base and the applicable tax rates.
Taxation of Individuals
From a tax perspective for individuals, the sale of an ownership share is considered a disposal of capital and is taxed as a capital gain. Taxation is influenced by a multitude of factors, making the involvement of an advisor before the transaction is finalized potentially crucial. The following circumstances, among others, can impact the taxation:
- Whether the company has undergone changes in its share capital (increases or decreases),
- Whether additional capital contributions were made,
- The gradual acquisition of the business share and the method of its acquisition,
- The existence of tax losses,
- The status of the buyer and their relation to the seller,
- Other factors.
Given that tax consequences can have a significant impact on the final outcome of a sale, it is highly advisable for the entrepreneur to prepare a preliminary calculation of the tax liability and consult with a tax advisor before the transaction.
Our advice for selling a company
Our key advice for a successful business transfer is: do not wait for a slightly better offer. If an offer is close to your expectations, accept it. A partial desired result is better than nothing, which is what you might end up with if you wait for the perfect deal that may never materialize.
When preparing a company for sale, there are no shortcuts. A successful preparation requires time and effort. In business processes, it is crucial to be aware of what we don’t know and where we need expert help. You must take numerous steps and complete everything, from developing the initial strategy to establishing contact with target buyers, negotiating, and managing due diligence.
Only a trusted advisor can guide you through the process, help you avoid pitfalls, ask the right questions, and ultimately, execute a successful transaction.
To learn more about the business sale process, you can read more on our website HERE. If you are considering selling your business or have any questions on this topic, please feel free to contact us at: david.ceplak@unija.com
