Transaction advisory

The experience of a businessman who sold his life’s work: how to get top dollar from the Chinese

By:
Kevin Probert-Ehaver,
Gregor Alaküla
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A businessman who started a company in Estonia even before the country had regained independence, Kevin Probert-Ehaver, recently sold his life’s work – the three Baltic companies in BK Group – to a major Chinese corporation, Hikvision. The transaction proved more complicated than planned, but in the end he managed to negotiate a price that was triple what was originally offered.
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Preparing for retirement

Probert-Ehaver was 57 years old at the time of the transaction and mindful of the fact that retirement wasn’t far off. He had two possibilities for exiting the life’s work he had built over the decades. Plan A was that he would sell the majority stake in BK Group to the management of BK Group’s subsidiaries – the Estonian, Latvian and Lithuanian units. “They wanted to become shareholders and so we agreed that they would gradually buy me out. I was hoping to retain one-fifth of the company as a pension earner,” he said.

Agreement had been reached on this in 2014, but four years later, BK group’s major supplier Hikvision played a wild card, making an offer to buy the company. “So, I had to choose whether to continue with my existing plan or accept their offer. If I had done the former, that would have left the risk that the supplier would quit selling to us at some point, which would have meant we needed a crisis plan,” said Probert-Ehaver about the considerations that led to the decision to sell.

With help from an adviser, the price went up severalfold

Having decided to sell, Probert-Ehaver contacted Grant Thornton to retain the services of an advisor who would guide him through the transaction process and assist in the negotiations. “The price ultimately paid was higher than the original offer,” he said, emphasizing that retaining an adviser paid off.

The head of Grant’s taxation business area, Kristjan Järve, said the role of the adviser originally lay in reviewing the buyer’s offer. “It was important to find an objective methodology to proceed from in negotiations, and we realised that the price could really be double or triple the original offer,” he said.

Järve said the price negotiations were hard due to the emotional level alone. “The seller sees it all as his life’s work and his assumptions and future perspectives are often not shared by the buyer,” he said. “The buyer will emphasize different assumptions in his analyses and tend to have a more conservative and pessimistic future vision, one where market risks are factored in more heavily,” he said regarding the situation going into the negotiations that succeeded in haggling a better offer than the original one.

A time-consuming process

The biggest surprise about the transaction for Probert-Ehaver was that it took so much time to go from the negotiations to closing the deal. “The buyer made their offer in summer 2019, we set out the intentions in the form of a contract that autumn but the deal was closed only in autumn 2020.” “But our colleagues in China promised the matter would be done quickly and their representative express their opinion at the end of the sale process that in fact it had gone fast – he said they’d never closed a deal that quickly.”

Järve said that the Estonian and Baltic perspective of the understanding of timeframe for finalising a deal is completely different to major corporations in Asia. “International buyers of that size hire advisers and they in turn retain the services of local advisers and verify everything on many levels,” he said. “Time must be budgeted.” Järve added that in reality, the finalisation of the deal went past October 2020; because the Chinese needed state approval for the deal.

Järve noted that the bigger the buyer, the more thorough they are. “They go over everything with a fine-toothed comb with the advisers and turn every stone a number of times,” he said. “Although the data we submitted were clear, the behemoth international group insisted on following its own rules, and investigate every detail, which meant additional workload for our management and our accountants also had a very tough half-year,” said Probert-Ehaver.

Järve emphasizes that for international and especially Asian corporations, it makes no difference whether the turnover of the company they are buying is in the hundreds of millions or the tens of millions. “The difference is that the large company can cope better with all of it while smaller ones have to ensure they keep their operations steady and distribute resources.”

In the end, things went well, no mistakes were found in the course of auditing BK Group and signing the final contract make it possible to use the options made possible by Estonia’s digital society and public services. “The transaction was notarised, not all parties could travel to Estonia due to the pandemic and so the remote authentication solution introduced by the Estonian Chamber of Notaries came in handy – without it, the transaction would have taken significantly longer, but now the three companies owned by BK Group were sold under one contract,” said Järve.

A deal that defied the US-China trade wars

During the negotiations, BK Group learned that Hikvision was blacklisted by a number of Western countries, being a Chinese entity. Even Lithuania decided to criticise the deal, pointing to potential security risks. This didn‘t deter the parties. “We weren’t directly influenced by any regulator or external party and thus the topic didn’t come up in negotiations,” said Probert-Ehaver.

Järve noted that the concern was about the trade disputes between China and political games. “To my knowledge, the second-largest manufacturer of security cameras is also a Chinese company,” he said, saying that the market would be controlled by the Chinese even in the absence of the BK Group deal. “As long as relations between China and the US are strained, all the others have to choose sides, but I would say that China’s technological level is higher than that of the US,” said Probert-Ehaver.

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