When the kids don't want company:

You've built a business from the ground up, investing years of work, dedication and dreams. It's your blood, sweat and tears - your life's work. But what if your children, the next generation, see their future elsewhere and are not interested in taking over the business? It's not the end, but an opportunity for a new chapter. Selling your business to a third party is a critical decision that can define your legacy and secure your financial future. But how do you manage this complex process smoothly, without unnecessary complications and with maximum benefit?

Author of the article: ​ARROWS (JUDr. Jakub Dohnal, Ph.D., LL.M., office@arws.cz, +420 245 007 740)

 

1. Why is early preparation crucial? Mrs. Novak's story and the risk of underestimation

Many entrepreneurs underestimate the time-consuming and complex nature of the sales process. They wait until "the time is right" or until external circumstances force them to sell. Unfortunately, this is a common and costly mistake that can lead to a significantly reduced sale price and unnecessary stress.

Imagine the story of Mrs. Novak, owner of a successful engineering firm. Her children decided to pursue careers abroad and Mrs. Novakova realized it was time to find a new owner. However, she didn't start preparing until the first health problems appeared. The pressure to sell quickly forced her to compromise on price, and she had to deal with audit glitches, outdated contracts with suppliers and unclear legal relationships with the property in a short time. It was a huge psychological burden and the transaction ended up dragging on for many months longer than necessary.

And that is precisely the point. Adequate preparation, ideally several years in advance, gives you room to optimize all aspects of the business that can affect its value and attractiveness to a buyer. It will allow you to identify and eliminate potential issues that could arise during due diligence, as well as reinforce the strengths of your business. By preparing early, you will not only gain peace of mind, but more importantly, a strong negotiating position.

When you speed up the process, you risk several things:

• A lower selling price: The buyer has stronger leverage and knows you're under time pressure.
• Dragging out the transaction: unexpected problems arise, negotiations stall, deadlines get pushed back.
• Higher costs for lawyers and advisors: everything is handled in a "last minute" mode, which increases fees.
• Increased stress and emotion: selling a business is already challenging, unnecessary complications make it worse.

2. What affects the value of your business? The buyer's perspective and what they care about

The buyer is not just looking for buildings, machinery and current turnover. He is looking for potential, stability and minimization of risk. He wants to invest in something that will bring him future profits and at the same time will not cost him additional unexpected expenses. From the buyer's perspective, the following areas are key and directly affect the price he will be willing to pay:

2.1. Solid financial foundations and transparency

• Audited accounts: are your financial records in good order? Are they audited and transparent? Unclear or incomplete accounting is a big deterrent and can lead to demands for price reductions. Without clear and verifiable numbers, it is difficult for a buyer to appreciate the true value.
• Stable cash flow: does the company have stable and predictable cash flow? Buyers appreciate companies that are not dependent on one-off projects or seasonal fluctuations. Irregular or negative cash flow signals instability.
• Demonstrable growth: are your sales and profits stable or ideally growing? Documented growth is a strong argument for a higher valuation. Buyers are investing in future profits.
• Cost optimization: Are your operating costs efficient? Identify and eliminate unnecessary expenses that could reduce profitability. A company with high and unoptimized costs is less attractive.

2.2 Legal and contractual documentation - Hidden minefields

The legal status of a company is often more important to a buyer than the financial results. A poor legal foundation can kill the entire transaction or lead to huge fines and penalties after a takeover.

• Contractual relationships: are all key contracts (with suppliers, customers, employees, leases) up-to-date, valid and unambiguous? Outdated or poorly worded contracts pose a significant risk. We often see contracts that are not in line with current legislation, which can lead to future fines or disputes and reduce the attractiveness of the business. If a company has unfavourable or risky contracts, this will be reflected in a lower bid price or compensation claims.
• Property ownership: Is it clear who owns all of the firm's assets (real estate, intellectual property, machinery)? Are there liens or encumbrances? Any ambiguity in this regard is a huge red flag and can lead to complications or withdrawal from the purchase.
• Intellectual property: do you have protection for your trademarks, patents, know-how? Is all intellectual property registered and in order? Unprotected intellectual property is a huge risk for the buyer as exclusivity is not assured and there is a risk of theft or misuse. Imagine selling a company with a unique product but without patent protection - the buyer would have no assurance that a competitor would not start producing it in a year's time.
• Employment relationships: are all employment contracts compliant with the legislation? Are there unresolved disputes with employees? It is essential to have all documentation in order and to comply with applicable regulations to avoid heavy fines from inspection authorities or claims from former employees. Unresolved disputes can mean tens to hundreds of thousands of crowns in fines and legal costs.
• Licenses and permits: does the company have all the necessary licenses and permits for its operations? Are they valid and up to date? If not, the buyer will have to invest time and money in obtaining them, or even risk stopping the business, which will of course be reflected in the price.

Who can advise you on this issue?

2.3 People and processes - the heart of any business

Even the best company is nothing without the right people and effective processes.

• Key Employees: Is the business too dependent on one or two key people (including yourself)? Do you have procedures in place for knowledge transfer? Ensuring continuity of key personnel is essential for a buyer; they don't want to buy a company that will fall apart as soon as you leave.
• Operational processes: are your internal processes standardised and efficient? Do you have systems in place to manage quality, inventory, production? Chaos in processes is a big deterrent.
• Management systems: what IT systems do you use? Are they modern and do they support growth? Outdated systems mean additional investment for the buyer.
• Organizational structure: Is the organizational structure clear and functional? Are competencies and responsibilities clearly defined?

2.4 Market position and competitive advantages - Potential for the future

The buyer is not only buying the past, but above all the future.

• Diversification of customers: is your company dependent on one or a few key customers? A diversified customer portfolio reduces risk and increases stability.
• Competitive Advantage: How is your company different from your competitors? Do you have a strong brand, unique technology, excellent customer service?
• Growth Potential: What are the company's future growth opportunities? Identify new markets, products or services that could attract a buyer.

3. Strategic preparation: step by step to a successful sale

Preparing to sell a business is not a one-time event, but a systematic process. The following steps will help guide you through the process with maximum efficiency and minimum fuss:

3.1. First step: Internal audit and company “clean-up” (12–24 months before sale)

Before you start looking for a buyer, you need to have your own company perfectly cleaned up. This period is key to maximizing value and minimizing risk.

• Comprehensive financial due diligence: have an internal audit of your financial records. Review all books, tax returns, profit and loss statements, balance sheets. See if there are any errors, discrepancies or inefficient practices. Many companies find that they have a suboptimal tax structure that reduces their value.
• Vendor Due Diligence: this is an absolutely critical step. Together with ARROWS attorneys, you will review all contracts, licenses, permits, ownership, employment agreements, liabilities and risks. The goal is to uncover potential issues that a buyer might discover during their due diligence and resolve them up front. Many sales are complicated or even canceled because of unresolved legal issues that are not discovered until late in the negotiations. Early detection and resolution of these issues can save millions of dollars and months of time.
• Optimise processes and documentation: document key operational processes, manuals and procedures. Ensure the business is not overly dependent on one person's knowledge. The client is looking for a system, not a collection of individual skills.
• Invest in key assets: consider investing in technology, upgrading equipment, or empowering key personnel to make the firm more attractive. Upgrades prior to a sale will usually appreciate in value.
• Clean up balance sheet items: Get rid of unneeded assets, bad debts or obsolete inventory that only weighs down the balance sheet and reduces the value of the company.

3.2 Preparing sales materials and determining fair value (6-12 months before sale)

Once you have "cleaned up" the business, it is time to prepare for the presentation.

• Information Memorandum: Prepare a detailed Information Memorandum (IM) that introduces your business to potential buyers. It should include key financials, a description of operations, organizational structure, market position, competitive advantages and growth potential. This memorandum is your company's calling card and must be perfect, clear and compelling.
• Company Valuation: Have an independent valuation of the company performed. This will help you set a fair selling price and have a strong negotiating position. Relying on a "feel" price can lead to great disappointment or to undervaluing the company.
• Identify potential buyers: Decide whether you will seek a strategic investor (competitor, supplier, customer) or a financial investor (private equity fund, family office). Each type of buyer has different priorities and motivations.

3.3 Finding a buyer and negotiating (3-6 months before the sale)

This is the stage when you start actively looking for a buyer and enter into negotiations.

• Reaching out to the market: Use networks, advisors or investment bankers to discreetly approach potential buyers. Discretion is key to avoid panic among staff or weakening your position with competitors.
• Sign an NDA: Always sign a Non-Disclosure Agreement (NDA) before sharing sensitive information. ARROWS will prepare a robust NDA to protect your information and prevent misuse. Without an NDA, you risk disclosure of trade secrets.
• IM Submission and Initial Meetings: after the NDA, you will submit an information memorandum and conduct initial introductory meetings. This is where first impressions are made.
• Indicative Offers: You will receive indicative offers from interested parties based on the information. These offers are usually non-binding but give you an idea of the potential price and terms.
• Selecting a preferred buyer: Based on the offers and the overall impression, you will select a preferred buyer with whom to proceed with negotiations. The highest price is not always the best choice - chemistry and vision for the future of the company are also important.

3.4 Due diligence by the buyer and contract negotiations (2-4 months before the sale)

This is the most intense phase of the sale, where the details are decided.

• Due diligence: the buyer will do his own detailed due diligence on your company - legal, financial, tax, operational. This phase will show how good your previous preparation was. If you have conducted a thorough Vendor Due Diligence, you will avoid many unpleasant surprises and delays.
• Contract Negotiation: based on the results of the due diligence, key sales contracts are negotiated, in particular the contract for the purchase of the business/shares. This agreement is the backbone of the entire transaction and must be perfectly balanced. It contains key aspects such as price, payment terms, warranties, indemnities, dispute resolution and many other provisions.
• Price adjustment: Based on the results of due diligence, the sale price may be adjusted. Thorough prior preparation minimizes the risk of significant adjustments and helps you maintain the originally agreed price.

3.5 Closing and post-closing phase

• Contract signing: once all details have been negotiated, all necessary contracts are signed. This is the moment when your life's work materializes.
• Handover and integration: after the closing of the transaction, the company is handed over to the new owner and integrated into its structures. This can be a smooth process or a complex operation, depending on the size and complexity of both companies. Often the contract includes an agreement for the seller to work with the buyer for several months or years to ensure a smooth transfer of know-how and customers.
• Post-closing adjustments: it may be necessary to deal with post-closing adjustments to the purchase price based on the final financial results at the date of sale ("closing adjustments").

4. Common pitfalls and how to avoid them with ARROWS: Practical advice

You may encounter a number of obstacles during the sale of a business. Here are the most common ones and how to avoid them with the help of ARROWS lawyers:

4.1 Underestimating legal risks - The ticking bomb

Many entrepreneurs focus on the financials and underestimate the legal side of things. But this is a huge mistake that can literally sink a company.

• Obscured ownership: does your property have a clear ownership history? Are all the entries in the land registry correct? If not, there is a risk that a buyer may be unwilling to buy the property, or buy it at a significantly lower price.
• Invalid licences and permits: Businesses often operate without realising that their licences or permits have expired or that they do not have them at all. This can lead to immediate fines, cessation of operations when a new owner takes over, and a huge reduction in the value of the business. Remember that violations, such as lack of a license, can result in fines in the hundreds of thousands to millions of crowns.
• Hidden liabilities: unresolved lawsuits, tax arrears, or environmental liabilities (e.g. environmental damage) can result in huge financial penalties for the buyer, who may want to reflect them in the price or abandon the sale altogether. It is crucial to identify these risks and either resolve them before the sale or include them transparently in the purchase contract and reflect them in the price with clear compensation for the buyer. If these liabilities are discovered after the sale, you may be liable to pay large sums out of your own pocket.
• Insufficient warranties and indemnities in the contract: The seller tries to minimise his warranties, while the buyer demands the broadest possible ones. Finding the right balance is an art. If you don't give sufficient warranties, the buyer will either lower the price or walk away from the deal. Conversely, warranties that are too broad can mean you'll be liable for problems that occur long after the sale.

4.2 Emotional attachment to the company - The key to rational decision making

Selling a company you have built up over years is like selling your own child. It is emotionally challenging. Many entrepreneurs succumb to pressure or overestimate the value of their company, which complicates negotiations and leads to irrational decisions.

• Take a step back: try to look at the sale as a business transaction, not a personal matter.
• Objective Valuation: Rely on objective valuations from independent experts, not your subjective feelings. Emotions can cloud judgment as to fair value.
• Outside perspective: Let lawyers and financial advisors lead the negotiations and follow their advice. They are objective and have experience with many similar cases.

4.3 Lack of transparency - A danger that always pays off

Attempting to conceal information or make "cosmetic adjustments" to financial results will always backfire. Buyers carry out thorough due diligence and anything hidden is likely to be uncovered.

• Trust is key: Discrepancies uncovered will lead to a loss of trust, which can either void the sale or significantly reduce the price. The buyer will feel that you are trying to deceive them.
• Legal Consequences: In addition, providing false information can have serious legal consequences, including criminal penalties for fraud.
• Be Proactive: Identify and proactively communicate potential weaknesses. Present a plan to address them. This builds trust and demonstrates your professionalism.

Who can advise you on this issue?

4.4 Poor communication with the team - Risk of talent drain

Announcing the sale of a company is a sensitive issue for employees. It can cause uncertainty, fear and demotivation, which can lead to key people leaving.

• Communicate the sale at the right time and in the right way. Too early an announcement can lead to an exodus of key employees. Too late can cause panic and speculation.
• Transparency (within limits): Be honest, but don't divulge details that could jeopardize the transaction.
• Reassure employees: Reassure employees about their future and the new owner's intentions. Present a vision of how the company will continue to grow under new management.
• Legal aspects of the transition: ARROWS lawyers will help you set up the employment relationship after the sale to ensure that the transition is in accordance with the Labour Code and to minimise the risk of disputes or claims from employees.

Conclusion: Your future starts today – Don't leave anything to chance

The decision to sell a business you have lovingly built is a significant and often emotionally challenging one. But it's also an opportunity to secure a well-deserved future and give your business new life under new leadership. Don't wait for circumstances or fatigue to force you to sell. Proactive and careful preparation is the key to a successful transaction that maximizes your reward and minimizes your risk.

Investing in timely and comprehensive legal support is not an expense, but a strategic investment in your security and financial benefit. Remember that mistakes in the sales process can take years to manifest themselves and have far-reaching financial and legal consequences.

Are you ready to start planning for the future of your business? Contact us today. ARROWS attorneys are ready to help you navigate the entire sale process with peace of mind, confidence, and the knowledge that your interests are in the best hands. Let us help you complete your business journey with the success you deserve.

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