“At the beginning of the war, transactions in progress were suspended, but starting in the summer, the process resumed", Grant Thornton Baltic’s Partner and Head of Tax Kristjan Järve told the Äripäev business daily’s radio show "Kasvukursil". Still, buyers and sellers are more cautious and the transaction process is taking longer than it used to.
As to whether international investors again have the appetite to look toward Estonia, Järve said it depends on the buyer. “If the buyer is a local competitor or party to a supply chain in Europe, risks are also evaluated adequately and the focus is on the long view. Outside the European Union, for instance in the case of institutional funds, there is likely to be more trepidation and we may still be in the red zone when it comes to some major deal."
The fact that it’s not the best of times in the economy need not mean that it’s a bad time to buy or sell a company, said Erik Suits, a Financial Adviser at Grant Thornton Baltic. “For buyers it precisely creates opportunities – often the companies where the owner manages itself are the ones that wish to exit a business as the economic environment changes. It also brings up the possibility to consolidate the market by buying up competitors. Turbulent times are full of opportunities and a fertile substrate for future growth."
Although it is easier to sell a company that is in good financial health, it is not hopeless to sell a company in difficulty. “The sales arguments will be a little different in such a case. In the case of a stable company, we look at historical results and future potential but in the case of a company in difficulty, the buyer instead looks at whether the company has any assets or a market share to claim. This has an effect on the pricing side as well as the sorts of conditions that get stipulated in the contract of sale," said Suits.
Järve added that it is hard to prepare a local-market-oriented business in difficulty for sale at a time when the entire sector is experiencing hardship.
If the entire sector is in trouble, the question is whom to sell to, if all the competitors are in the same jam. Yet one should not underestimate a buyer for whom it seems like an opportunity, says Suits. "The question is about the big picture: A company from one sector is often in an investment portfolio where other sectors are also represented. If the entire sector is in difficulty, it doesn’t automatically mean that a competitor or the competitor’s owner necessarily lacks self-financing for buying a company. I would again repeat: a turbulent time on the market is a great opportunity to increase market share and establish a foothold on new markets."
In an uncertain environment, buyers try to mitigate their risks even more aggressively to gain assurance about the future, Järve says. They do it through the conditions of the sale, trying to shift the operating risks to the seller. "There was recently a case of talks where the prospective buyer basically was looking for a guarantee that the margins for suppliers would not change. The risk is thus shifted on to the seller, and the buyer skims off the cream, so to speak," said Järve.
Depending on the buyer, the considerations why a sale ultimately doesn’t go through can vary. Sustainability is playing an increasing role, which is taken into consideration in addition to ordinary commercial, tax and legal risks. Ethical considerations have also come up in the same way.
Despite the cooling economic environment, the reasons for selling companies have not changed, said Järve. For companies in a mature phase of its lifecycle, one of the most common reasons for selling is that the owner wants to retire. Many of the owners who went into business during the restoration of independence era have now reached an age where they want a quieter life, to leave the business world. This phase has been actively impacting the transactions market for the last few years. Judging from the small and medium-sized enterprises sold, the phase has not ended yet,” he added.
There are many other reasons for exiting business. “The owner may have other companies they want to focus on. It may be that the sector is just generally slowing down and interest is waning. One of the most common reasons is a conflict between co-owners,” said Suits.
As a last example Järve cites management buyouts. “Sometimes management approaches the owner or the owner would be well served by talking to the active management before shopping their firm on the outside market.” He said that a certain price coefficient should be factored in when selling a company to management. As a rule, the management is already invested in the success of the growth and in their view that should be reflected by some sort of discount."
The most logical is to contemplate sale in the mature phase of a company’s existence when cash flows are positive and supplier and customer relations are stable. Then it is easier to come up with support arguments for the price. That does not mean that selling during the early phase or growth phase isn’t possible.
For starters, look at competitors, although sometimes owners rule this out as they don’t want to reveal business secrets. Then there are the other parties in the value chain, both suppliers and customers, who may be interested in shoring up their security of supply or moving closer to the end consumer. The current management and financial investors – i.e. different funds – may be interested in buying.
Both are valid options. Professional support for the sale process means tax, financial and legal advisory as an integrated service. If you are selling your company independently, factor in high workload and time expenses, which will take the focus away from business activity. Another that can happen is that you may fail to skilfully marshal arguments for the price, or end up not being able to close the deal.
In the course of the preliminary agreement, all key conditions of the transaction should be discussed in addition to the price itself. For example, the collateral period and amount, and no-compete clauses.
The acquirer may have a very different business strategy from that of the seller, so there may be an interest in the company undergoing as little changes and strategic decisions as possible during the talks. What might strike the seller as a key investment might appear unnecessary for the potential buyer.
The most labour-intensive part of the sale is the negotiations stage. The discussion of just one specific clause in the contract can take months, especially if it is about the price. It is not a good idea to be overoptimistic and think that the sale of the company could be closed in three or four months. It might, but generally it will take much longer.
The first person you sit down at a table with might not be the one who ends up buying the company. For that reason, key decisions and investments, orders or expansions should not be neglected during negotiations. If the transaction fails, yet operations were suspended, that will mean the loss of a year of two in the company’s development and it will be harder to start the process all over again.
If you have similar challenges and questions, please contact our transaction advisers.
