8 Key Considerations When Selling a Company
The negotiation of the purchase or sale of an equity stake in a company is a process of significant importance, not only for buyers and sellers, but also for the company itself, its employees, customers, suppliers, and other stakeholders.
Despite the strategic relevance and complexity of the subject, many business owners enter discussions with potential buyers or investors without proper preparation and without a clear understanding of the critical issues involved in Mergers and Acquisitions.
To increase the chances of a successful transaction, sellers should pay close attention to a number of important points before and during the negotiation process.
1 | Be clear about the reason for the sale
The decision to sell a company may be driven by different motivations, such as the retirement of executive shareholders, the lack of family succession in the company’s leadership, the need for liquidity due to personal matters, the desire to invest in other sectors, or disagreements and relationship strain among partners.
Understanding these motivations is essential, as it brings clarity to the type of transaction structure that would be both desirable and acceptable to the sellers. This, in turn, allows for the development of negotiation strategies and tactics that are properly aligned with the shareholders’ objectives.
2 | Prepare in advance
An M&A transaction involves the discussion of several complex matters and the analysis of the company’s historical performance, future outlook, operations, financial position, risks, and growth opportunities.
Potential buyers or investors will make their investment decision based on a careful review of historical and projected information. For this reason, starting conversations without prior preparation can significantly reduce the chances of a successful outcome.
Preparation allows shareholders and management to anticipate questions, organise relevant information, address potential weaknesses, and present the company in a more structured and convincing manner.
3 | Know the company’s fair value before entering negotiations
Understanding the company’s fair value from the perspective of potential buyers or investors is a crucial part of the preparation process.
A well-supported valuation range provides important guidance during negotiations, enabling shareholders to assess whether the offers received are reasonable and aligned with the company’s economic potential.
Company valuation is typically performed through quantitative methodologies, such as discounted cash flow analysis. Under this method, the company’s fair value is estimated based on its expected future cash generation, according to management’s best assumptions and projections.
Conducting a valuation before negotiations also has another important benefit: it helps substantiate the assumptions behind the projected numbers. The more credible and well-supported these assumptions are, the lower the perceived risk for potential buyers and the greater the likelihood of achieving a more favourable price negotiation.
4 | Understand the market
Before entering a negotiation, it is essential to understand recent M&A activity and the broader outlook for the company’s sector.
What were the most recent transactions in the industry? What prices were paid, and what valuation multiples were implied? Who are the most active buyers and investors in the sector? What are their investment criteria, strategic priorities, and main concerns? What other potential acquisition targets are available in the market?
Building this market intelligence is fundamental to defining negotiation tactics, developing a critical view of the internally prepared valuation, and better understanding the universe of potential buyers and investors.
5 | Keep debt at appropriate levels
Another important factor in the sale of a business is the company’s level of net debt in relation to its operating performance.
Net debt is generally calculated as total debt and financial obligations of any nature, less cash and cash equivalents. In M&A transactions, overdue obligations, even if not properly recorded in the financial statements, may also be considered as part of net debt.
Because cash and debt are typically assumed by the buyer after closing, net debt is usually deducted from the amount paid to the sellers. As a result, if net debt is too high, the actual proceeds received by the shareholders may be significantly reduced.
In these situations, sellers may prefer to first address certain liabilities before pursuing a transaction, in order to negotiate a sale under more attractive conditions in the future. In more extreme cases, the company’s debt may even exceed the value of the business itself, making a transaction difficult or practically unfeasible.
6 | Identify and mitigate relevant risks
Depending on the company’s level of compliance with tax, labour, environmental, regulatory, and contractual obligations, different levels of risk may exist within the business.
These risks may become liabilities in the future, in the form of tax assessments, penalties, fines, lawsuits, or indemnification claims arising from non-compliance with applicable laws, regulations, or contracts. In the context of M&A, these non-materialised, unidentified, or unrecorded risks are commonly referred to as contingencies.
Particularly in emerging economies, it is not uncommon for companies to operate with some degree of contingencies, often without shareholders having full visibility of the potential magnitude of the issue. If these contingencies are significant in relation to the transaction price, they may become a major obstacle to completing the sale.
To avoid surprises in advanced stages of negotiation, companies should consider periodically conducting preliminary accounting, financial, labour, tax, legal, and environmental due diligence. This allows them to identify the most relevant risks and weaknesses in advance, estimate their potential financial impact, and implement mitigation plans to keep contingencies at manageable levels.
7 | Give proper importance to accounting and financial controls
Weak, inconsistent, or inaccurate accounting and financial information can be highly damaging in an M&A process.
In addition to raising concerns among potential buyers or investors, poor-quality information requires them to spend more time and effort verifying whether the financial statements accurately reflect the company’s actual financial and asset position.
Reliable financial controls, organised management information, and consistent accounting practices increase credibility and reduce uncertainty during the transaction process. In larger transactions, audited financial statements prepared by a reputable audit firm are often required by investors or buyers.
8 | Hire experienced professional advisors
The negotiation of the purchase or sale of a business requires a specific combination of technical knowledge, experience, judgment, and negotiation skills.
Transactions conducted with the support of financial advisors specialized in M&A tend to have a higher probability of being completed successfully and under better terms.
M&A negotiations are typically long processes, with several potential points of disagreement between buyer and seller. An experienced advisor can help structure the process, prepare the company for market approach, identify and contact potential buyers, support valuation discussions, manage information flow, and propose solutions to unlock negotiation deadlocks.
The advisor also helps avoid unnecessary exposure of the company’s shareholders to potential buyers, reduces the risk of decisions being made in the heat of negotiations, and keeps emotional attachment to the business away from the negotiation table.
With knowledge of corporate finance and company valuation, the advisor is able to support the company’s price expectations in a technical and strategic manner, while also building a narrative aligned with the shareholders’ objectives.
Equally important is the involvement of a law firm specialised in M&A, responsible for drafting transaction documents, negotiating legal terms, and designing mechanisms to protect the interests of the sellers.
Selling a company is often one of the most important decisions in the life of an entrepreneur or shareholder. The more prepared the sellers are, the greater the chances of conducting a structured, competitive, and successful transaction.
Written by Alexandre M. Scherer Borborema. Investment Banking Managing Director at Cognos Global Partners Brazil.
