If you intend to sell your business – good planning pays off

If you want to sell your business for the highest possible price, you need to do your homework. Usually the to-do list is clear, but the list may become longer after receiving the first comments from potential buyers and advisors. The whole process takes about 12 months, but the negotiations with the buyer(s) take at least 6 months, i.e. the whole process can last anywhere from one to two years. 

Shareholders are under the illusion that they are the best to effectuate the sale, but the reality is different. The sales process should not be managed by the board members or shareholders, although the ultimate decisions remain with them. The process of selling companies owned by local founders in Latvia could be summarised as follows.

1.     The process should be managed by professionals. There is an extreme view, and I partially share it, that it is unacceptable for the board or the shareholders to take the lead in the sale of a company. The board and the shareholders should be engaged in an active dialogue with their advisors – lawyers and finance experts. The board should take care of the continuation of the business rather than be a part of the selling process. Sooner or later a conflict of interest among the board members will arise because their fate, including the motivation tools, will be decided by the new majority shareholder. Things get really messy when the board intends to buy the business from the shareholders or decides to softly blackmail the buyers with de facto control over the business and possible departure immediately after the transaction.

2.     Choosing a sales team. The seller must timely select an experienced M&A team. Their experience in the particular sector is not crucial – personal and frequent experience in international transactions of a similar scale is more important. First of all, the sales team should consist of financial advisors (we recommend searching for “corporate finance Latvia” or “investment banking in Latvia” on Google). There are about 15 organisations in Latvia that offer such services and differ in performance level and experience. The most recognised institutional advisors are Oaklins, Porta Finance, Superia, Catella, Callidus Capital, BIC Securities, Baltic Partners and Prudentia. Each of them has their strengths, different industry knowledge and experience. The same applies to choosing the right legal advisors (we recommend searching for “M&A lawyers Latvia”). If the main task of the financial advisor is to obtain the maximum transaction price, the legal advisor is responsible for “covering” all the possible risks that may arise during the transaction process. Before making a decision, it is important to meet the potential team members in person, as the final choice in cases when all potential advisors meet the “experience criteria” will always be subjective. The sales team is the one that prepares the list of home assignments for the seller. The advisors will be able to look at the company that’s being sold with the eyes of a buyer and will be more objective than the board members or shareholders could ever be.

3.     The buyer sets the sales price. Sellers almost always overestimate the value of their business. The only objective gauge is the estimate given by a buyer who is truly ready to buy it. Before starting the sales process, you need to agree with a financial advisor on the so-called price corridor. If no agreement is reached, it is not advisable to start the sales process. If the seller thinks the price has been set too low, the best solution would be to stay patient and “grow” the company. Sometimes the sales process can last several years until the company reaches the size that allows the buyers to increase the price and the shareholders to obtain the minimum selling price.

4.     Majority ownership. The best chances of selling a company are in the so-called “100% transaction”, i.e. when all shareholders wish to sell their shares. The process of selling a public limited liability company (AS) and a private limited liability company (SIA) is essentially the same. If the majority ownership (> 50%) is sold, the process becomes slower and more risky, as it is unclear how the other shareholders will react to the transaction, especially with respect to exercising pre-emptive rights in cases of selling a SIA. If the seller is not the majority shareholder, the process becomes more complex and one of the seller’s first home assignments is to become the majority shareholder in the company.

5.     Financial statements. In order to prepare an accurate price offer, the buyer will definitely want to have a clear picture of the company’s actual financial position. Internationally recognised audit companies such as Deloitte, EY, KPMG or PwC normally ensure that the data which a price offer is based on is of high quality. Other audit companies such as BDO and Grant Thornton are still strengthening their position in the Latvian market. There are a few Latvian audit companies, such as Merhels, that are competitive with the above-mentioned companies in terms of quality and for sure have less conflict of interest potential. It should be noted that preparation of financial statements in accordance with international standards is an important home assignment which requires at least 6 to 12 months.

6.     The speed of the process. In order to avoid unexpected surprises, it is necessary to clearly agree on the pricing formula. If no agreement on the price formation algorithm has been reached, any preparations with respect to the transaction text can be considered a waste of time. Time is typically saved if the seller’s legal advisor starts working on the first draft of the purchase agreement.

7.     Protecting assets against legal risks. One of the most difficult home assignments is to identify the most important assets of the business and eliminate any legal risks associated with them. Such risks are often identifiable in the real estate and intellectual property sectors. For example, if illegal construction is detected, it must be demolished or legalised. If trademarks are owned by third parties, the use of these trademarks must be restricted. If a seller does not have exclusive rights to its unique product, such rights must be secured. A seller may also become exposed to legal risks in cases of contracts that impose disproportionate penalties and contracts with a term longer than 12-24 months that cannot be terminated with a 3-6 month notice. It is often necessary to re-sign these contracts with the company’s management or agree on other contractual changes, e.g. non-solicitation and non-compete clauses.

8.     Potential buyers should be approached after the homework has been completed. Other financial advisors will always be aware of the fact that a company is being sold. Often this means that the financial advisors will have already identified potential buyers in the Baltics or Europe and will have prepared a brief overview of your business. As previously mentioned, the sales process should begin after the homework has been completed, which usually takes 6 to 12 months. The potential buyer should be contacted shortly after a financial statement has been prepared and approved by an auditor. From there on, it takes about 3 to 6 months to complete the sales transaction.

There is no doubt that a company can be sold without completing the previously mentioned home assignments. Or they can be assigned to the buyer. However, experience has shown that in such cases both parties may end up disappointed due to disproportionally long sales process, changes in price or risk of liability for previously unresolved issues, including high litigation risks that may arise after the transaction has been completed.

by Gints Vilgerts, Partner, M&A, Latvia

Related Lawyers

Gints Vilgerts

Partner, M&A

+371 29 107 768

gints.vilgerts@vilgerts.comEmail

Vairis Dmitrijevs

Head of M&A

+371 29 258 370

vairis.dmitrijevs@vilgerts.comEmail

Related Experience

Defended a department store before the Consumer Rights Protection Centre in alleged price display breach for loyal customers.

Helped an energy company to explore ways of overturning the regulators ruling that the transmission system operator was not independent of its shareholders. The main challenge in the case was focusing on the fiduciary duties of the client’s management in managing the company while the shareholders are creating a conflict of interest and compliance risks.

Successfully defending owner of an airport hangar against claim brought by construction company regarding the owner’s refusal to pay for the defective construction works. On 14 January 2019 the district court adopted a judgement in favour of the client, which became effective as of 5 February 2019.

Representing an aviation company in an ongoing litigation regarding the repayment of investments. The company who received the funds later transferred its’ business in several coordinated transactions to a related company, and thereafter became insolvent. The client brought a claim against the recipient of the borrower’s business pursuant to Article 20 of Commercial Law.

Instagram