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External growth operations are complex and sometimes risky processes. Here are the points to keep in mind before you start.
What is the nature of the operation?
There are several types of external growth, acquisition or disposal operation . At least three questions must be asked, in order to specify the economic purpose of the operation:
– Is it a takeover operation or is it a minority operation?
– Is it a question of buying securities or buying a business as a goodwill?
– Is the remuneration in euros or in securities?
These elements are very important because they will condition the structure of the operation and have a very strong influence on the negotiation process.
Choosing the right procedure
Acquisition or disposal operations are long processes that can be more or less complex depending on the nature of the operation. In summary, a majority operation is generally less complex to implement than a partnership. A transfer of title is also easier to carry out than a transfer of activity or goodwill. Finally, an operation against cash is also generally simpler to implement than an operation remunerated by securities. The key to success in this type of operation will be to fully understand upstream the issues of structuring and implementation on a legal, financial, tax or social level. In a word, you have to anticipate.
The pitfalls to avoid for the buyer:
For the buyer, the main pitfall to avoid is having overvalued the property acquired. Therefore, valuation must be done properly. A valuation is based on two points: the profitability analysis of the operation, to be assessed from a financial point of view, but also according to the intangible value of the property (ownership of brands, ownership of real estate assets, etc.). The valuation is also based on the absence of major risks such as major litigation or a significant social risk. These valuations are subject to due diligence, also called “acquisition audits”. These are used to validate profitability assumptions and identify risks.
The law offers a purchaser minimum guarantees that will allow him, if he made a mistake or has been deceived, to request compensation, or even the cancellation of the operation. These guarantees are sometimes difficult to implement. Practice has therefore developed other forms of contractual guarantees, called “guarantees of assets and liabilities”. These consist of specifying for the seller the consistency of the activity sold, and ensuring that the operations comply with the law, and that there are no significant liabilities. It is also a compensation mechanism, which will provide for a guarantee period and a maximum limit of liability. The last mechanism is called the “guarantee of the guarantee”, which ensures the effective payment by a third party, a bank for example, in the event of this liability guarantee being called into play.
The challenges for the seller
The main pitfall for a seller is overconfidence in the potential of the company he wishes to sell or whose capital he wishes to open up. In a logic of anticipation, the seller will have to make an objective overview of the financial, legal, fiscal, social and strategic situation of his company, preferably with the assistance of external advisers. In addition, he will have to “dress the bride”, in other words, give his company the most favorable image possible. He may, for example, correct the irregularities identified during the inventory phase. And finally, work upstream on the structuring of the operation to present the simplest possible sales plan for the buyer. This is how a seller can maximize the valuation in a sale transaction.
DAMY Law Firm , Nice, Company Law, Update 2022