Having already presented the ideal company sale from the seller’s point of view, we would now like to look at the company purchase from the buyer’s point of view.
Agreement on purchase conditions
Once the target company has been identified, the seller has been approached and has shown interest in selling the company or the company shares, the next step is to agree on the main terms of purchase. These should then not only be exchanged verbally or by e-mail, but, if there is already agreement at this early stage, should be set out in writing in a letter of intent (LOI, also known as term sheet).
At this point at the latest, the buyer should clearly identify the conditions of the purchase that are essential for him and consider whether and how they are to be taken into account in this early phase of the company purchase.
Reasons for purchase should be clearly identified and considered early on
The primary reasons for the desired purchase are important. For example, is it the technology, know-how or IP rights (patents, trademarks) of the target company? And is the intention only to use this technology for one’s own company and products? Or does the target company have no or no attractive technology or know-how at all, but e.g. the employees are the primary reason for the buying interest? Or is it the sales channels and customers in a market to be developed for one’s own products? Or are only certain company divisions of interest, while others can remain with the seller?
If the purchase is not aimed at the entire company, it can be considered whether only the interesting parts of the company can be purchased and whether this could also be interesting for the seller.
Examine relevant parts of the company at an early stage
If only certain parts of the company are of interest, it should be agreed with the seller in the letter of intent that the parts which are decisive for the interest in purchase can also be examined at an early stage. The seller then commits to provide the necessary information at an early stage. However, this is often opposed by conflicting interests on the part of the seller. This is because the latter – especially if the potential buyer is a competitor – may only be willing to provide detailed information about or access to employees, distributors or key customers at a late stage of the negotiations and when a deal appears certain.
However, the buyer’s goal should be to identify as early as possible in the buying process whether the target company can actually meet expectations. After all, if this is not the case, the purchase terms must be adjusted as early as possible or – if this is not possible – the negotiations must be terminated with the least (cost) effort.
Approval by authorities or endorsement by third parties required?
Another aspect to be identified early on is any required approvals by authorities as well as approval or endorsement of the purchase by third parties. For example, is approval by the antitrust authorities or by the German Federal Ministry of Economics required? The latter may be necessary if the buyer is from a non-EU/EFTA country. If such approval is required, it may cause a delay or even jeopardize the purchase.
Furthermore, there may be essential suppliers or customers where it should be checked at an early stage whether they will continue to work with the target company after the change of ownership. In the case of key employees, the buyer should also ensure at an early stage that they will remain committed to the target company after a change of ownership.
If this is the case, it should be agreed with the seller that discussions may be held with the relevant third parties early on. However, it should be considered in advance whether confidentiality interests conflict with such discussions.
Purchase price and preconditions
Of course, the essential purchase conditions also include the purchase price or at least the parameters according to which the purchase price is to be determined. The letter of intent must also state the conditions under which this purchase price has been agreed and how it would be adjusted if these conditions were not met.
Putting purchase conditions in writing at an early stage
In addition, depending on the individual case, there may be further essential purchase conditions that should be introduced early in the negotiations for the company purchase and set out in a letter of intent. The basic recommendation is to put key purchase terms in writing early on in order to identify as quickly as possible whether an agreement and completion of the purchase is likely to be reached. Tactical considerations, however, can lead to exactly the opposite: namely, the decision not to raise certain purchase conditions with the seller until late in the process so as not to overburden the negotiations with them in the early stages.
We are happy to assist in setting out the essential purchase terms in writing in a letter of intent (LOI). We can also review such a draft from the other party. The best way to do this is to involve us at an early stage of the sale of the company.