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Free Article - PMR Consulting Mergers & Acquisitions in CEE: a practical guide part III

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We present the third article in the series on how to cope with the challenges of M&A in CEE countries. Our aim is to address most prominent issues of company purchase/sale transactions in a local context.

We previously covered the issue of the target business's legal entity versus the non-core assets it might possess and the related tax implications. This paper is intended to focus your attention on two other owner-related matters.

Sentimental value

Bearing in mind recent CEE history, it is clear that the open market, privately owned companies in which investors around the world might be interested will usually have a market backlog dating back 20+ years. Our beliefs lead us to omit businesses from consideration that are privately owned as a result of privatization. The current owners and a number of key managers founded these companies, that is, companies that have operated during the last two decades under the leadership of the initial founders. Because the growth achieved at the company is most cases purely organic, we conclude that the equation is simple: today's success is the result of company owners who spent a good portion of their lives developing their enterprises to the particular state seen today. While the prospective investor may or may not see anything special about this, the owners will. This brings up the common topic of sentimental value.

Sentimental value comes from the owner's perspective: it is the premium that owner would expect to be included in the equity value as recognition of the time and effort spent on the development of the business. Some call this sweat equity! From the perspective of a pure discounted cash flow valuation, clearly these efforts cannot be recognized. Yet this business transaction represents a once-in-a-lifetime business opportunity for the owner(s). In a typical situation, the owner has devoted vast amounts of time and energy into one company: the one that is on the verge of being sold. In this situation, the owner will require the utmost attention and understanding from the investor side. For investor it will be a deal, for the owner often it will be the DEAL.

Advisory for the owner

Going further, another variable needs to be addressed while entering into dialogue with entrepreneurs: will the owner be supported by an advisor in the transaction process? In most cases, the answer will be “No”. In CEE, broadly speaking the concept of an owner hiring a business advisor to support any significant aspect of business operations is perceived as unnecessary expense. This understanding comes from the owner's belief that it would be impossible for a consultant to provide expert advice who has not experienced the industry as the owner has. Obviously the task of being in conversation with an owner who lacks an advisor makes dialogue more challenging. This is especially true at the stage proceeding negotiation and the signing of the Letter of Intent (expecting detailed company operations description); preparation and execution of Due Diligence; and the discussion of representations and warranties around the Share Purchase Agreement. Owners will usually be extremely cautious and distrustful while being asked for sensitive information, especially when too proactively approached by an investor.

The investor's advisor must cover two areas simultaneously in order to ensure that the acquisition process moves forward at an expected pace while potential risk is mitigated. First, clearly defined milestones must be an element of any successful process management: targets profiling, targets identification and approach, letter of intent, due diligence and share purchase agreement. This is the first part of an advisor's duties. Yet at the same time, the advisor must place strong emphasis on recognizing and understanding the line-up of key stakeholders and decision-makers on the vendor side. This must include identifying individual and group interests, which will then lead to a critical demarcation between those who support the transaction and those who would act as deal breakers. It is by addressing the influential parties in an appropriate manner, addressing objections, and satisfying expectations that the transaction process will continue in the expected direction.

A transparent and caring approach is definitely required for CEE regional specifics when SMEs are approached with an acquisition offer. By establishing the acquisition process outlined above, a potential investor will have better transaction control and influence. This process will also offer the owner – the prospective seller – a better understanding of the process, a scenario that can include many challenges and question marks. As a result, by adopting this process the investor increases the probability of achieving the foremost goal: a successful deal settlement.

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