The Process of Selling a Company

Why is so important the process of selling a company? In this blog post, we will discuss the stages which are involved in the M&A operation. One of the reasons the M&A process is used is to articulate the operation of selling a company.

Therefore, we recommend a focused read, that will allow you to understand the process better.

Milestones in the Sales Process of a Company:

Non-Disclosure Agreement (NDA) – Confidentiality Agreement

The Confidentiality Agreement guarantees that the information exchanged by the parties in the process is not disclosed to third parties. With the NDA signed, the parties promise not to divulge the shared information among others. It protects the confidential information exchanged between the parties, providing them with legal rights. The period in which the NDA comes into force will be specified in the agreement.

The most important parts of the NDA are:

• Identification of the parties
• Defining which parts are considered confidential.
• The extent of the confidentiality obligation.
• Exclusions of the confidential treatment.
• Terms of the agreement.

These agreements expressly describe which information is private. The categories of information covered by the agreement are detailed. Also, how the buyer can use the information is limited.  However, the type of information protected by an NDA is virtually unlimited. Any knowledge exchanged between the parties can be considered confidential.

The seller will want to make sure that the buyer will be only using the information to evaluate the acquisition opportunity.  So, the seller can implement controls or additional procedures regarding the confidential agreement.

The more common exclusions in the NDAs include:

• Information that is already known by the other party and that is not subject to any obligation of confidentiality.
• Information publicly known
• Information disclosed by a third party that has no duty of confidentiality.

Term Sheet – as an outline of the sales process of a company.

It is a non-binding document that contains all the key steps related to the investment. It establishes the general parameters of the process but does not force once to complete the investment legally.  It is the first step of the transaction between the potential buyer and the partners of the target company.

A term sheet can contain certain sections that are legally binding, such as confidentiality and exclusivity clauses. The latter stops the sellers from looking for or negotiating with potential third-party investors over a specific time. The confidentiality clause protects the information that is relative to the business. As well as anything else that the company makes known to the investor.

Main provisions:

1. Assessment Pre-Money and Post-Money

• The pre-money assessment is based on the number of outstanding shares before the deal is carried out. While the post-money assessment is based on the number of shares that exist after it.

2. Capitalization and Valuation

• This clause establishes the price per share of the target company. As preferred shares have more attractive conditions, the private equity investors prefer those to common stock.

3. Dividends
4. Anti-dilution Provisions

• They serve to protect the investors if the company’s shares fall lower than they have before. The conversion price of all the shares purchased at a higher price is adjusted downwards. In this way, the percentage owned by investors is maintained. This results in additional bonus shares in the stock.

5. Exchange Clause

• The company promises to buy back its shares when it has the financial resources to do so. It will only apply when the company has become profitable.

6. Drag and Support Clause

• The right to drag protects the majority shareholder, forcing the minority to join the sale of the company.
• The right to support grants the minority shareholder the right to sell their shares together with the majority. Under the same conditions.

7. Right of First Refusal

• This allows the shareholders to buy the shares offered by other partners before possible third parties outside the company.

8. Administration and the Management Body
9. Transmission Limits

• They are established to ensure that the shares are not sold to a buyer that the company does not want as shareholder.

Many additional issues can be regulated in the Term Sheet. Such as:

1. Earn-out: additional payments based on the future performance of the deal.
2. Pre-requirements: Requirements that must be met for the effective completion of the investment.

Letter of Intent (LOI) / Non-Binding Offer (NBO) / Memorandum of Understanding (MOU) – the development of the Term Sheet in the process of selling a company.

This document is normally non-binding and serves as an “agreement to agree” between two parties.

It will indicate (among other things):

• The purpose and structure of the transaction.
• The target price and payment conditions.
• The timings of the negotiations and a possible closing date.

To know more about an NBO, we recommend the following article:

Due Diligence (DD)

• After accepting the target price, the buyer will carry out the verification process of the company’s information, known as Due Diligence.
• It is a process of investigation or audit to confirm or review every aspect of the selling company. It ensures that there are no discrepancies with the previously provided information which the offer was based on.

To know more about Due Diligence, we recommend the following articles:

Sales and Purchase Agreements (SPA) – Purchase Contract

After examining the true state of the target company and confirming a buyer’s interest, it is now time to close.

This is the time to negotiate the regulatory contacts of the deal and the sale contract (without danger to others).

The contract of the sale regulates the transaction, identifies the aim, price and the method of payment. The purchase agreement includes the results of the negotiations to date. Therefore, the reference of its content with the TS and/or the LOI.

This document contains the following main parts:

• Identification of the parties.
• Definitions and interpretations.
• Aim of the contract.
• Price
• Closing of the Sale and transfer of sales or participants.
• Declarations and guarantees.
• Liability Regime.
• Transfer
• Duty of confidentiality.
• Non-compete.
• Transfer of rights.
• Tax and expenditure.
• Notifications
• Governing Law and Jurisdiction

Closing and Post Closing

The speed of the purchase may be affected by the fulfilment of certain conditions precedent. Compliance with such conditions would be defined as closing. However, the relationship between the seller and the buyer is not over after closing. The parties may have agreed (for example) to adjust the price after closing. The purpose of this provision is to guarantee the value exchanged at the close of the deal.

Once at this point, the process of integration, for both parties, is opened. Their objective is to successfully finish the transaction with a generation of value.