Tip 1: seller, know your own company

The sale of a company is largely about the question whether the purchase price that a buyer is willing to pay, meets the expectations of the seller. Other interests and sentiments may also play a role for a seller (such as maintaining employment agreements with employees or preserving the identity of the company). However, these interests are ultimately subordinate to the price discussion.

For successful purchase price negotiations, it is important that not only the buyer but also the seller has a good idea of the value of the company. If the seller overestimates the value of its business, that will reduce the chances of finding a buyer. If the seller underestimates the value, there is a good chance that the seller will be underpaid or willing to agree to unfavorable terms of sale.

In my view, it is worthwhile to involve a Dutch (financial) advisor in the sales process of a company who can provide a proper indication of the value of the company, the potential purchase price and the market conditions for similar M&A transaction in the Netherlands. In addition, this advisor should be able to provide a number of insights that are necessary to come to an agreement with a buyer, such as what are the (average) working capital requirements of the company is and what amount of excess cash can possibly be paid out to the seller prior to the sale.

Tip 2: be prepared

If there is no specific time pressure, the seller is advised to take the time to properly prepare the sale of the company. A good preparation will always be awarded: either in a higher sales price, or a smoother and quicker sales process. It is usually a combination of those two elements.

When preparing the sale of your company, consider the following possibilities:

• foresee to increase company revenues and reduce costs (i.e. realistic profit optimization that can be included in the forecasts);
• document customer contracts for a longer/fixed period of time;
• secure IP and knowhow;
• create flexibly in contractual relations that may not be of interest to a buyer;
• clean up the balance sheet (e.g. by collecting outstanding receivables, paying (intercompany) debts and paying out excess capital);
• pay off unfavorable business financing and get collaterals released;
• be aware of what you are going to sell (shares or assets) and (re)structure the object of sale to facilitate a future transfer;
• be aware of the identity of the seller. If there are several selling shareholders, it may be beneficial to implement a joint holding company that can act as a single seller (which can then also provide the required securities and guarantees, instead of the individual shareholders);
• identity the key people within the company. Determine who is indispensable for (the management of) the company and try to make agreements with these people to stay on for a minimum period after the transfer.

Tip 3: know your market and potential buyers

If you have good knowledge of the market in which the company is active, it is easier to identify potential buyers and approach them with a teaser for preliminary discussions. Ultimately, as a seller, you only need one buyer for a successful sale of your company, but to find that one party it is often necessary to approach several potential buyers. In addition, approaching multiple prospective buyers can create a sense of competition between the buyers (which may have a positive effect on the purchase price).

Tip 4: don’t lose sight of the business!

A sales process is intense. It requires substantial extra work and attention from management, while the business continues. Especially when there are several potential buyers involved who all want to have their interview moments and submit information requests, the seller may become tempted to solely focus on the contemplated sale and to lose sight of the operations. This may result in backlogs, for example, in the preparation of quotations, creditor / debtor administration or deprived employees.

For a buyer, continuing sales, the correct and timely collection of debtors and retention of employees are important factors for determining the purchase price. It is therefore important that the health of the company – also during the sales process – remains the first priority of the seller.

Tip 5: choose the right guidance

As a seller, choose (Dutch) legal and financial guidance and be sure that the people you engage have experience with M&A transactions in the Netherlands. Buyers are usually professionally assisted by experienced specialists in Dutch law and accounting. As a seller, you will want to be able to have sufficient counterbalance in the commercial negotiations as well as in the preparation of the legal documentation in accordance with Dutch law. In addition, if you have the right guidance, it is easier to keep the focus on the business during the sales process (as referenced to in tip 4).

Tip 6: ensure a good LOI

For a successful business acquisition, a good Dutch law letter of intent (LOI) is almost indispensable. Of course, there may be exceptions, for example if there is a lot of urgency (and the buyer immediately produces a draft share purchase agreement) or if buyer and seller already know each other well and have sufficient confidence in a good outcome. However, in most Dutch law M&A transactions, the execution of the letter of intent is a tipping point: when parties reach that point, there is a good chance the finish line will also be reached.

With a letter of intent, the buyer and seller outline how they contemplate the M&A transaction (without these agreements being legally binding). In this blog you will find an example of a Dutch law letter of intent, including some background and useful insights of the LOI from my perspective as Dutch M&A lawyer.

Tip 7: process management: keep momentum!

The sale of a company in the Netherlands is often an intensive process in which many different parties and people are involved, as anywhere really. With good process management, you will keep the momentum going. An average M&A transaction can quickly take 4 to 6 months (from introduction to execution). And there is a risk that this process will be delayed if there are holiday periods in between, or if the buyer’s attention suddenly has to be shared because he gets involved in a parallel purchase process.

If the sales process takes too long, the parties may also become exhausted and irritated. This is deadly for the atmosphere in the negotiations. In addition, due to the long passage of time, the value of the company may deviate from the original valuation. If the value of the company increases too much in the course of the negotiations, a seller becomes less and less willing to sell at the original valuation. If the value decreases over time, it is precisely the buyer who will look for ways to make up for that difference (something a seller does not want).

So even though self-imposed deadlines are mostly chosen arbitrarily, for a successful acquisition process it is certainly important to achieve such deadlines as much as possible.

Other publications by Lukas Witsenburg in these series include:

For more information about a merger or a company sale in the Netherlands, please feel free to contact Lukas Witsenburg (Dutch M&A lawyer), via email: l.witsenburg@penrose.law or tel.: +31(0)6-15025194.

Advocatenkantoor Penrose, Amsterdam.