Bartosz MIŁASZEWSKI
Managing Partner at RSM Poland

The sale of a family business is always a far more difficult a process than its divestiture by means of a fund or a large corporation. Selling a family business means a great change for both the entrepreneur - the business owner, and the staff. It also exerts an inevitable impact on the relationships with customers and suppliers. However, such a change primarily affects the owner and staff.

Typically, the reason prompting a decision to sell a family business is the occurrence of one or more of the following situations:

  • problem with business succession within a family,
  • a great deal offered by a buyer,
  • desire to obtain funds for other investments/projects.

In the case of the majority of entrepreneurs in Poland, the sale of a business is a once-in-a-lifetime opportunity, a remarkable event that changes the business owner’s life.

A business that is often built from scratch throughout an important part of life is to change the owner and manager. Most commonly, problems with business succession, i.e. the inability to hand over the business to someone within the family, stand behind the decision. Sometimes, an alluring offer comes along - a buyer is determined enough to offer a very attractive price and sometimes the rationale is the desire to raise funds for the development/launch of another business or simply to change one’s lifestyle.

Regardless of the reason for making a decision to sell a business, most entrepreneurs, after careful consideration, tend not to announce it publicly and reserve this knowledge for a narrow circle of closest associates. An entrepreneur who decided to sell a business that has been built for many years is afraid that sharing that information with the staff could have a demotivating effect on them - fearing an uncertain future, they might seek another job in advance, the contractors might be less favorable in negotiating terms of cooperation and the customers might be less willing to sign long-term contracts, etc.

Finding a potential buyer, negotiating with them or even the submission of the first non-binding offer of purchase does not mean that the transaction will prove successful, therefore, the sales process is usually kept secret until such time that a Sales and Purchase Agreement (SPA) or an Asset Purchase Agreement (ASA) is signed by the seller or a binding offer of purchase is made by the buyer.

Such a situation, however, poses a considerable risk to the seller, as in most cases, the purchase price depends on the outcome of a due diligence investigation performed by the buyer’s agent. By keeping the sales process secret until binding agreements have been signed, the seller is usually kept in the dark about the price they will be able to obtain for the sale of their business. As due diligence - due to the sale process being kept secret - may be carried out by the buyer only after a binding offer of purchase has been made, a number of factors having a potentially negative effect on the price might be revealed in the course of the due diligence investigation. As a result, the seller then may find themselves under tremendous pressure and without much chance of withdrawing from the deal, which often means that any arguments and conditions put forward by the buyer must be accepted.

On occasion, the seller may be faced with an even more unfavorable situation - certain facts may come up during the due diligence investigation which will result in a deal-breaker. It is worth noting that the buyer is usually an operator who is well experienced in negotiations and sales and purchase transactions, and the seller is usually a first-timer.

The so called, vendor due diligence is the solution to the problems discussed above. VDD is a due diligence analysis (a thorough, multi-dimensional audit) performed on behalf of the current business owner (the seller) at the start of the process of getting the company ready for sale. Vendor due diligence is performed by a team experienced in transactional projects providing the seller with the following information:

  • what needs to be corrected (the buyer will pay attention to the given aspect and probably request a better price);
  • where the key risks are (to which the buyer will pay attention);
  • how much the business is really worth (using the most commonly chosen pricing mechanisms: the EBITDA calculation, Debt Free-Cash Free, working capital).

Simultaneously with the vendor due diligence investigation, a report is produced which the seller may present to a limited number of bidders. The VDD report describes any adjusted positions, risks and the status quo of the company being sold in a clear and transparent manner, providing a potential buyer with detailed information which can facilitate making a thoughtful decision resulting in the submission of a binding offer. Whenever a buyer makes an offer based on a vendor due diligence report, they tend to feel more confident and satisfied with the seller’s representations and warranties, therefore, they are more likely to agree on a "locked box" offer formula, i.e. a fixed purchase price independent of other factors.

The vendor due diligence team works on behalf of the owner, so there is no risk that the information about the company being prepared for sale is somehow leaked, if the owner wishes to keep the fact secret. Employees of the family business readied for sale are fed the information that the owner has assigned a cross-sectional internal audit to minimize the risk of operating the business.

What will the seller gain?

  • A report including financial statements adjusted by the results of the vendor due diligence investigation;
  • A transaction value determined on the basis of the adjusted statements;
  • Information on the risks uncovered during the course of the VDD investigation, and thus the time needed to address them and prepare appropriate arguments;
  • Time to make adjustments and eliminate the risk in order to achieve a significantly higher price.

What will the buyer gain?

  1. Financial data that can be trusted and based on which a true value of the company they intend to buy may be calculated reliably.
  2. Information on the risks identified during the VDD investigation, which can be discussed with the seller in order to make a more efficient decision regarding the offer.

Additional gains from VDD

  • The VDD report is made available by the seller to a limited number of bidders, thus eliminating the confusion of several DD investigations being carried out by several entities (working time and stress for the employees of the company);
  • both sellers and buyers know exactly what information other bidders have received (the leakage of sensitive information is eliminated);
  • buyers save on due diligence costs;
  • negotiations and the selling process are accelerated.