Selling to a Corporate Buyer: A Strategy for Successful Exit

A corporate buyer offers the entrepreneur an opportunity to sell his business. The personal nature of this transaction makes it a more attractive option than an investment.

Motivations

A corporate buyer is usually a competitor who wants to strengthen its business model vertically or horizontally by acquiring a company. Possible motives can include expanding one’s customer base, expanding into a new sector, or creating synergies between the two parties. In all respects, the potential the corporate buyer sees in your current company in terms of profit and value motivates the buyer. The corporate buyer is interested in a long-term investment and, unlike other investor groups, does not pursue a direct exit strategy. Therefore, after being sold, the company’s continued existence is primarily secured, which often calms the seller (and their employees).

Advantage of Trust

In addition to this reassuring sentiment, you also need to know the buyer beforehand if this is not already the case. Since corporate buyers often operate in similar or related sectors, you already know the prospect or have some familiarity with him or his business. If not, you’ll get to know him in the course of negotiation.

The extended nature of a company sale gives you the chance to familiarize yourself with the prospective buyer. You will learn his intentions and have the opportunity to suggest your own value to the company.

This interpersonal contact alone often provides sufficient information that makes company owners more receptive to handing their companies over to people who are no longer strangers. The in-depth communication between the two parties limits the unknown factors in the sale of the company.

Effects on Employees

The future of employees is a big issue when selling a company. Existing employment contracts remain valid after the business transfer, which avoids employee complications, as it is important to the new owner to keep the knowledgeable staff. Nonetheless, one of the biggest problems in selling a company remains the integration of different corporate cultures.

For the previous owner, collaboration with his old company need not end. As part of contractual negotiation, the former owner may continue as an external consultant or short-term employee. This transition phase can make the separation process considerably easier, especially for companies that have been family-owned for several generations.

The former owner’s interest in the successor is to supplement and expand his own business through acquisitions sensibly: a more differentiated product portfolio, opening up new markets, or using patents and licenses.

The challenge for the successor is in post-merger integration. Integration of the acquired company into the existing or new corporate structure has both legal and economic aspects. Legal integration is usually straightforward; the business and “cultural” side are much more difficult. Only in the course of integration does it becomes apparent whether the company value corresponds to what was paid or whether the company seller achieved a sales price for his company “above value.”

Post-Merger Integration Considerations

The success of a corporate acquisition depends on whether the post-merger integration succeeds. It’s a process extending over a defined period benchmarked by individual steps, as well as a one-off, time-limited project with a clear goal. Setting up an integration project in which the integration process is organized and controlled is critical for post-merger integration when selling a company. The project should start before the purchase contract is signed because integration usually requires advance notice for appropriate preparation and planning.

What to look for in post-merger integration. With every post-merger integration, different business models, processes, corporate cultures, and even people who do not fit together immediately collide. As a rule, the integration means considerable changes, especially in the acquired company, which naturally encounter resistance. The integration project must overcome those hurdles and ensure that the two cultures become amicable.

Reorganize the management network. Management organizations that have so far been different must be merged. Responsibilities and competencies will be redefined and management positions filled. After the post-merger integration has been completed, a uniform, coherent management structure must exist.

Adjust your corporate identity. The company acquisition and integration affect the external perception of the merged business entity. Customers, business partners, and the public must know the purpose of the company acquisition and its (positive) effects on existing relationships.

Integrate employees. Employees must be motivated to pull together and remain connected to the company. Key people need to be retained. This is, among other things, a task for internal corporate communication and is supported by other measures (e.g., training courses, incentive systems).

Refine business operations and processes. Integration puts existing approaches to the test. Which processes can be kept unchanged? Where are adjustments required? Which processes have to be redesigned? A successful integration project answers these questions.

Related: 10 Reasons M&A Deals Fail. 

Corporate Sale

To sell a company successfully and at a reasonable price, you must follow the rules of the game. Every successful company sale begins with the seller’s preparation. Therefore, the earlier you start to prepare the company for the sale, the more successful the subsequent sale will be.

“Classic” Company Sale Process

Preparation is key, but practice without organization or direction doesn’t help. To sell a business on the best terms requires following a codified process.

  • Internal due diligence: Review of all essential documents for problem areas and weak points.
  • Information memorandum: Create a neutral presentation of all areas of the company. The document should include an executive summary, company history, corporate strategy, products and services, market and competition, and finances with a detailed 5-year plan.
  • Marketing collateral: Develop an anonymous presentation showcasing the essential aspects of the company to be sold to generate interest from potential buyers. This document should not exceed two pages.
  • A long list and shortlist: Search and select the companies to be addressed (“targets”) and define priorities. The M&A advisor then sends marketing collateral to the shortlisted targets to protect the identification of the seller.
  • Confidentiality agreement: Obtain a declaration of confidentiality from interesting targets.
  • Information memorandum: After receiving the signed confidentiality agreement, send the interested potential buyer the information memorandum.
  • Management meetings: Schedule meetings between the seller and potential buyer and their critical people for personal introductions and clarification of questions.
  • Due diligence preparation: Compile the due diligence documents using the due diligence checklist.
  • Strategy meetings. Schedule a second and maybe a third meeting to discuss further details (future strategy, future tasks of the seller’s management, etc.).
  • Letter of intent: Obtain the prospective buyer’s letter of intent containing all essential aspects of a subsequent purchase/sale contract.
  • Due diligence: The buyer’s consultants execute due diligence. Value Scout recommends that the seller only let the buyer’s advisors conduct the due diligence after signing the letter of intent. Alternatively, the seller can commission a “vendor due diligence” before the start of the M&A process. This is independent due diligence conducted by lawyers, auditors, and tax advisors. The buyer receives the completed vendor due diligence report and does not have to carry out his own due diligence before signing the contract.
  • Negotiation. The seller and buyer negotiate the purchase/sales contract.
  • Signature and execution. Meeting any agreed-upon conditions, the buyer and seller sign the contract. Closing takes place, and ownership of the company shares is transferred to the buyer.

The Personal Connection

Selling a company to corporate buyers can be a much more personal process than other options. This can be particularly beneficial for owners who are emotionally attached to their companies. In this way, they can still take care of the future of all parties concerned and exert influence to a certain extent.

Do you need support with succession planning for your company? Value Scout would be happy to support you in finding the right successor.

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Matt Lawver

Matt Lawver

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