Sale of a Company: the Importance of a Good Valuation

Before buying or selling a company, you must be clear about the answers to the following questions:

What do you want to achieve?

This is the first question that every buyer and seller must have an answer to before sitting down to negotiate. It is important to know how far each party is capable of going and at what point they consider that the operation is not acceptable because it does not compensate.

Why is the other party interested in buying or selling the company?

When a business is valued, the factors for which it is wanted to be bought or sold will directly influence. It is not the same that an entrepreneur wants to sell his company because he needs liquidity or because he wants to retire and does not have a person who wants to continue with the activity of the business.

What form of payment and what terms do I prefer?

When the time comes when the desirable value is agreed upon by both parties and before signing the contract for the number of audits required, the form of payment must be discussed. The most common are bank transfer, cash, bank check or bill of exchange. Regardless of the method of payment, it must be reflected in the purchase agreement and, in turn, it is advisable to add all the clauses regarding this area by the lawyers. For example, in all installment purchase agreements, a clause is usually set by which the seller recovers ownership of the company in the event that the buyer breaches any of the clauses.

What studies should be carried out prior to the sale?

Once the possibility of reaching an agreement is known, all the reports to be carried out must be detailed, for example, the sales book or infomemo.

This report will be provided by the buyer and is what is known as a company's cover letter. It does not include detailed information about the business, but it does include a summarized description in case future buyers back out.

Only when binding agreements are established between the parties, all information about the company is provided through a due diligence process.

Should I sign a preliminary private contract or a letter of intent?

Yes, the letter of intent will describe the most relevant points of an agreement between the two parties. In this way, the two parties record the desire to formalize the transaction and establish guidelines for the future operation and those commitments that will be formalized later with a contract.

The only binding effect of the letter of intent is the obligation of exclusivity and confidentiality, but if both parties wish, they can determine that it has that binding character and establish what the consequences would be in the event that any party breaches it.

Why is it so important to have a Company Appraisal report?

This is a process that is used for multiple purposes, with the objective of quantifying its total assets, that is, to achieve an estimate or quantification of all the elements that make up the business structure, including its projection, assets, activity, customer portfolio, real rights, intellectual property rights, position in a specific economic sector and any other tangible or intangible element susceptible to valuation.

There are times that require the valuation of a company, as occurs in the processes of purchase/sale, debt restructuring and obtaining lines of financing, and other diverse scenarios, from processes of capital increase, entry and exit of partners, analysis of investments and divestments to situations of inheritances or successions, or even, the remuneration of shareholders.

Is it necessary for each party to make its own valuation?

Yes, because no valuation is going to have the same value as another. As it is not exact, each hypothesis, methodologies, knowledge of the business and future projections can give a different value.