Transactional, M&A -Mergers & Acquisitions - legal advisory - business advisory - sale process

Transactional and M&A Section - Legal

CEAG works with its clients in every phase of the transactional process, M&A and other transactions primarily in the following steps:

• Searching for a potential acquisition target
• Identifying a strategic buyer
• Structuring the transaction
• Due Diligence
• Franchisor disclosure document
  
• Project and acquisition financing
• Stock and commercial shares and their co-ownership and security
• Draft purchase agreement
• Localization of Master Franchise / Franchisee Agreements
• Financing documentation
• Negotiating the transaction
• Closing the transaction
• Post-closing support

Ever since its founding in 1993, CEAG has taken part in a series of successful commercial projects dealing directly with mergers and acquisitions, founding joint ventures, project manufacturing, privatization, establishing companies and start-ups, regulatory issues (including licensing and permits), and other investment transactions.

CEAG has experience not only with providing legal and commercial solutions to regional and international companies but also with representing sellers, buyers and financial and strategic investors. Thanks to this, CEAG can draw from its knowledge of the expectations of both sides and identify potential problems which could impair or delay the transaction during the negotiating process.

Although CEAG has its seat in Prague, it enjoys a strong standing in Central and Eastern Europe through the CEAG Legal Exchange, which provides CEAG with the capacity to ensure and coordinate legal and commercial transactions across the entire region. The organizational experience and expertise is supported by the commercial section of CEAG, which offers commercial and strategic advisory services.

Transactional and M&A Section - Commercial

Purchasing or Selling a firm – commercial advice before and during the transaction

1. Purchasing a firm

Among the main advantages of purchasing a company is undoubtedly minimalizing the period of time needed for building up a functioning firm with a good position and name in the market. Usually, this deals with a strategic decision serving to expand the purchaser’s position in the market and its portfolio of products or services, thereby increasing its customer base. Another advantage is a stable cash flow, a good reputation and an easier possibility of gaining the financial means for further expansion. Of course, all of this is on the assumption that you are buying a healthy, fully-functioning firm.

a) Even the purchase of an existing company has its own disadvantages

Of course the greatest disadvantage can be a higher purchase price. It is always necessary to compare the costs involved in building up a firm to that of buying one. If, however, saving time is one of the main factors, it is necessary only to weigh whether or not the purchase price is adequate for the time saved. One of the main disadvantages is the hidden risks that are uncovered only through very careful vetting, most of the time with expert assistance. For instance, one of the factors taken into consideration when valuating the company is even the amount of its receivables, and to carefully verify to what degree they are good, quality receivables.

ALWAYS VERIFY THE MOTIVE OF THE SELLER, in particular when you are buying a firm in a new market. What are the trends in the market, what is the regulatory environment, the competition, the taxation burdens, the purchasing power, and the political and economic stability, etc.

b) Where to begin?

• Establishing the criteria
• Analyze the market
• Candidates and favorites
• How much and I willing to spend
• What are the risks?
• The structure of the transaction

c) What all is there to do?

Establish your criteria which the company must fulfill, e.g., it position in the market, the quality of its products or services, its annual turnover, its position in international markets, the quality of its customer portfolio, or the degree of entrance barriers to certain markets. It is also necessary to set your priorities, determine which criteria are absolutely essential and on which you are willing to compromise as the case may be.

Look about the market carefully and find which firm meets your criteria and whether or not there exist reasons for why its owner would want to sell it. Create a group of candidates and favorites.

One of the fundamental factors is how much you are willing and able to pay. We assume that at this phase you already have worked out a strategic plan, the component of which is the financial plan. Why are you buying the firm, how do you want it to grow further, and should you purchase it, will you have sufficient money for further growth—and if not, will a bank lend you the money? CEAG and its external consultants will discuss with you the price variations for a given company and the possible sources of financing. Perhaps you have the feeling that it is too much. Yes, purchasing a firm is not a simple matter; and, you should turn to legal, commercial and taxation advisors. Do not forget that the majority of entrepreneurs understand their businesses perfectly but do not purchase a company every day. And though most legal and commercial advisors may not understand exactly the technological processes of your firm, they will know where there are hidden risks and which purchase price is for the firm because that is their everyday activity.

d) You have found the right firm and want to address the owner?

Addressing the owner of the potential target company can be easier through a third person, by means of your legal representative or commercial advisor. Be patient, as the right persuasion takes time.

Be attentive and follow closely the reaction of the owner of the company. Unwillingness to provide any information could be caused by his initial distrust, but on the other hand, when one is successful and does not have anything to hide, one usually enjoys displaying his accomplishments. However, it is not exceptional for the owner to request that you keep the matter secret before his employees. And this is even in your best interest, since up to this point they have been working well and any extra information might lead to the wrong impression as to their future—and you do not want to buy a firm without employees.

e) How does the process work?

Letter of Intent >> Confidentiality Agreement >> Due Diligence >> Term Sheet >> Drafting Agreements and Negotiations >> Signing Contracts and Closing the Transaction

Letter of Intent - the offer to purchase the company. This document summarizes the basic goal and intent of both sides and can contain the parameters of the transaction, the price range, and the purchase conditions. The Letter of Intent also contains the provisions by which both sides can revise or even walk away from the transaction entirely.

Confidentiality Agreement – demands placed by the seller on the purchaser, that he keep secret and safeguard sensitive commercial information which will be provided to him within the framework of vetting the company.

f) Due Diligence

Due diligence is the opportunity for you and your advisers to thoroughly check the value and quality of the firm and discover possible risks. Everything from corporate documentation and licenses to contract documentation, guarantees, and the financial situation of the firm is examined, because it deals with the thorough vetting of the company from the side of the purchaser. Ascertained risks and insufficiencies are of course reflected in the price offered and the contractual documentation.

The following is a brief overview of the areas examined in a due diligence exercise:

• Foundation charter and documentation
• Documentation on the transfer of shares/stock in the company
• Licenses, permits and rights to activities
• Real estate and movable property
• Suppliers and agreements with suppliers
• Customers and contracts with customers
• Financial statements
• Loans and credits
• Remaining contractual documentation of the company
• Proof of having acquired property and its ownership
• Intellectual rights (trademarks, licenses, etc.)
• Ecological concerns
• Employees, contracts, employee benefits

Term Sheet - initial (uncommitted) offer made by the purchaser to the seller on the basis of the results of the due diligence exercise. This document already contains concrete conditions for the transaction, for instance price, means of payment, contingent postponement conditions such as the steps which must be taken before the purchase agreement goes into effect or before the purchase price will be paid. You will then negotiate, with the assistance of you legal advisers, the exact and final terms for buying the company on the basis of the term sheet.

Contractual documentation - Your lawyers have drawn up the purchase agreement, where they have addressed the risks ascertained in the due diligence exercise, but one of the most important tasks of the lawyers is to state in the agreement the guarantees the seller is providing against risks that can arise after you have purchased the firm (possible unpaid taxes, claims, disputes, etc.).

Closing the Transaction – although the list of steps for the entire transaction is rather long, in the majority of cases the parties reach an agreement, the agreements are signed, and the whole transaction is brought to a successful closure.

However, there is always the need to thoroughly weigh whether or not this is the really the right transaction, the one which fulfills the concepts you had, and whether or not the risks which you are willing to undertake are truly acceptable. In the end, it can even be beneficial to leave the transaction unexecuted. Therefore, we as advisors have no problem recommending to our client to step away from the purchase, should we have the feeling that the risks are too great to be borne.

g) How much do such services cost?

It is very difficult to state a fixed cost. In the majority of cases, we work for our clients either on the basis of a monthly fee or a fee for each phase of the transaction. In addition, our firm obtains a “success fee” (after successfully finalizing the transaction), which can be figured according to a scale corresponding to the amount we have negotiated down the final purchase price on behalf of the buyer. However, this is always by agreement with the individual client.

Economic Competition (Unfair competition and protection of economic competition)

• unfair competition
• protection of economic competition

Both branches arise from different concepts, that of the EU Community and that of the national level, but both have the same goal, to ensure the function of economic competition among competitors in the market and in case of any violation, to ensure the compensation of the injured party.

CEAG is aware that the possibility of protection by means of both branches is still not fully utilized in the Czech Republic, despite the fact the possibility is granted both to large firms and small tradesmen or individuals.