Calling all entrepreneurs! Are you hoping to realise the value of your assets, take a step back, retire, or even take a new direction in life? A business transfer is a natural occurrence in the life of a company, whether a trading or a holding company. Both buyer and seller must follow a few key steps to ensure a successful business transfer.
The valuation of a company is generally based on one of three main methods, or a mix of these.
Depending on the sector in which the company to be transferred/acquired operates, the most suitable method should be used, or a weighted mix of the different methods.
Buyer due diligence provides the opportunity to analyse the actual situation and to plan upfront for the costs to be shared by the vendor and buyer in the future.
There are two types of due diligence: vendor and buyer due diligence. Vendor due diligence is carried out in advance of the transaction and provides the opportunity to clarify certain issues which could result in pointless discussions during negotiations. Buyer due diligence provides the opportunity to analyse the actual situation of the target company and to plan upfront for the costs to be shared by the vendor and buyer in the future. In its due diligence, the buyer analyses certain characteristics of the company. During this process, the buyer should consider:
Depending on any risks uncovered, the buyer may decide to withdraw, negotiate a lower acquisition price for the company, or request additional guarantees. It is in the vendor’s interest to carry out due diligence to identify any potential weaknesses in the company and resolve these before putting the company up for sale. This will help avoid major issues during negotiations by resolving these issues upfront wherever possible. Due diligence is thus a key stage in the transfer of any company, for both the buyer and the vendor.
The shareholders’ agreement is made between the parties taking over the business to define the rights and obligations of shareholders.
This is an agreement made between the parties taking over the business, or between the vendor and the parties taking over if the vendors will remain as shareholders in the company; it defines the rights and obligations of shareholders. In general, the agreement may include the following elements:
This agreement evidences the transfer of the company from the vendor to the buyer. In the representations and warranties clause of this agreement, the vendor declares and guarantees the veracity of certain information, for example, that they are the owner of the shares being sold, and that the company is validly constituted and complies with all tax, accounting and employment rules in force.
If the warranties given by the vendor are not respected, the buyer may contest the assets and liabilities
If the warranties given by the vendor are not respected, the buyer may contest the assets and liabilities warranties clause for protection from hidden future costs. For example, if the liabilities prove higher than indicated, the vendor undertakes to take over any unknown liabilities arising after the sale of the company which result from events prior to the sale.
Post-closing assistance clauses require the selling managers to remain in the company for a certain period of time, e.g. to facilitate business continuity, transfer their know-how, and maintain the client portfolio.
A non-competition clause prohibits the vendor from forming a new company with an identical business for a certain period of time.
In the event of administrative offences of a civil or criminal nature, illegal arrangements, illegal employment, corruption, fraud, non-compliance with data protection regulations or negligence by the managers leaving the business, the company will bear any penalties imposed, which will burden the future earnings that buyers may have hoped for, or may even endanger the survival of the company. In this case, the buyer may seek compensation from the vendor on the basis of the sales agreement and the representation and warranties provided by the vendor.
The transfer of a company is a complex process requiring upfront planning to ensure that negotiations proceed smoothly. It is generally recommended to take advice on strategic positioning as well as on accounting, tax and legal matters.
This article was prepared by Mr Renaud LE SQUEREN, Partner – barrister, and Mr Matthieu VISSE, Senior Associate – barrister, at DSM Avocats à la Cour*.
* Article translated from French by a BIL service provider
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