Many business-owners look to sell at some point. The reasons for selling may vary but often it is the opportunity for the owner to capitalize on the years of hard work that have gone into building up his or her business.
 
Poland has been constantly progressing ever since the fall of the communist regime in 1989. The country successfully managed to catch up with other competitive countries in the area and has now become a country preferred by foreign investors. Many Polish small and medium enterprises have grown during the last 30 year and now the Polish business-owners look for opportunities to sell their businesses and look forward to receiving the offers from potential buyers.
 
There are many ways of managing a sale process from the perspective of a business-owner. The most common scenario for SMEs is signing the letter of intent, carrying out the due diligence analysis and signing the sale and purchase agreement. This is the traditional model.
 
For many, selling will be a once-in-a-lifetime event and they will need an assistance from M&A lawyers and corporate finance advisors. The process has usually three phases (signing the letter of intent, carrying out due diligence and signing the SPA) which are explored below.

1. Signing the letter of intent
 
The first step in the process (following the receipt of the satisfactory offer in a letter or email from a buyer), will be preparing and signing the letter of intent (also known as “heads of terms” or a “term sheet”). It should set out the key terms of the deal that have been agreed in principle (in a combination of face-to-face meetings and correspondence). This letter, which is usually non-legally binding, should ideally set out:
 
a) The financial terms.
 
b) The form that the purchase price will take if any of it is to be in non-cash forms, such as loan notes or shares in the buyer.

c) The deal timetable and target completion date.

d) Whether the buyer is to be granted a period of exclusivity and if so - for how long.
 
e) Any conditions to which the buyer’s offer is subject, typically legal, commercial and financial due diligence, board approval, satisfactory tax structuring and agreement of definitive transaction documents  

Even though it is expressed as non-legally binding, the letter of intent is one of the most important documents in a transaction and will be referred back to at numerous times as the detailed negotiations proceed. A good letter of intent should cover the commercial points in enough detail to ensure that all the potential “show-stoppers” have been dealt with but should not go into comprehensive detail, as this is the job of the definitive documents. Its principal purpose is to enable the parties to proceed into the next stage of the transaction with the reasonable degree of confidence that they have a common understanding as to the main terms of the deal.
 
The letter of intent will generally contain some legally binding elements, such as provisions relating to confidentiality, exclusivity and responsibility for fees. These could be important if the negotiations break down for any reason and so should be reviewed by lawyers.

2. Carrying out due diligence
 
Once the letter of intent has been signed, the buyer will start its due diligence process. The basic legal principle underlying a company purchase is caveat emptor (buyer beware). In other words, once the buyer has bought the business, it cannot complain afterwards. The vast majority of buyers are therefore keen to find out everything they possibly can about their target business before paying the purchase price. Due diligence typically breaks into three principle categories.
 
a) Financial due diligence – usually carried out by a firm of accountants; this is one of the most important elements of the buyer’s due diligence and will include a detailed examination of past trading performance, future forecasts, accuracy of reporting systems, assets and working capital. Sellers should expect to be faced with many requests regarding financial and accounting information.
 
b) Legal due diligence – usually carried out by the buyer’s lawyers; this aspect will focus on matters such as legal structure and ownership, contractual terms, loans and bank security, property matters, employees, intellectual property and environmental compliance. Whereas typically the buyer’s accountants might spend some time on site at the commencement of the financial due diligence, the legal due diligence tends to be carried out remotely. The buyer’s lawyers will submit a due diligence questionnaire requesting information and copies of relevant documents. Then it is sent on to the buyer’s lawyers who will then prepare a due diligence report to the buyer.

c) Tax due diligence – sometimes included as part of the financial due diligence, the buyer will want to understand whether all taxes have been paid and what is the risk that the tax authorities may challenge the company’s results.  

Most buyers will also want to carry out a commercial due diligence which typically will be done by the buyers representatives. Commercial due diligence focuses on the strength and quality of customer relationships, contractual terms, internal business processes and anything else the buyer considers important commercially.
 
The results of the due diligence process will be the basis for the buyer to take the final decision on the purchase.

3. Signing the sale and purchase agreement  

While due diligence is progressing, the parties start working on the detailed documents of which the sale and purchase agreement (SPA) will be key. This will set out the definitive terms of the purchase and include all the protections sought by the buyer to safeguard its investment. The SPA will include the following:
 
a) The price and all payment terms – where the deal includes an earn-out element, the SPA will also include the formula for arriving at earn-out payment – usually a multiple based on average profits over three to five year period. The definition of profits for these purposes will usually be very detailed and will include numerous adjustments to the reported figures in the statutory accounts.
 
b) Any price adjustment mechanisms agreed – buyers typically require the business to be left with sufficient working capital in order to be self-funding when it takes the business over. As the level of working capital will fluctuate on a daily basis, it is quite common for the SPA to provide for accounts to be drawn up after completion based on the position as at the completion date (known as completion accounts) and for the price to be adjusted retrospectively, depending on whether the working capital shown in the completions accounts is above or below a pre-agreed target figure.
 
c) Warranties and indemnities – warranties are a series of statements by the sellers about the condition of the business at the date of sale. If these turn out to be untrue, the buyer has a means of redress by way of a claim for breach of warranty. These will cover everything from the accuracy of the accounts used by the buyer to value the business to the absence of disputes with staff and relationships with customers.  
 
Because the warranties are so extensive it is often the case that they will not be all true. This does not mean that the warranties cannot be given, just that the seller must make disclosures, so that the buyer is aware of the true position before completion. Before the SPA is signed, the seller should prepare a list of all the areas where the warranties do not accurately describe the business in a letter known as the disclosure letter. This is delivered to the buyer on signing of the SPA. To the extent of the disclosures, the buyer will not be able to claim breach of warranty. The more comprehensive the disclosures are, the less risk there will be of the buyer making a warranty claim after the deal has been completed.

An indemnity is an undertaking by the seller that it will meet a specific potential liability which has been identified by the buyer and which the buyer is particularly concerned about.
 
A buyer and sellers may wish to add other deal documents such as loan notes or shareholders’ agreement if the sale is proceeding by way of a partial sale so that for a period of time both the sellers and the buyer will be shareholders in the company.

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