Despite the Ukraine war and the impact of COVID-19 on the M&A market, the high volume of cross border M&A transactions in Poland continues apace as both buyers and sellers seek out attractive acquisition opportunities on a global basis.
Many business-owners in Poland have been waiting for a good moment to sell their businesses and now it seems that this moment has come. The Polish owners want to capitalize on the years of hard work that have gone into building up their businesses throughout the last 30 years. Poland has been constantly progressing ever since the fall of the communist regime in 1989. The country has successfully managed to catch up with other competitive countries in the EU. There is no doubt about it - Poland is an economic success story. Many Polish small and medium enterprises have grown significantly during the last 30 year and now they decide to sell their businesses.
What does it take to buy the business from a Polish owner? Are there any special features of such an acquisition?
Yes, there are special features of the Polish private acquisition. Although the procedure is similar to other European jurisdictions (letter of intent, due diligence, share and purchase agreement etc.) there are some peculiarities of the process in Poland which need to be taken into account. Here they are:
- Due diligence
- Once the letter of intent has been signed, the buyer can start its due diligence process. The basic legal principle underlying a company purchase in Poland 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.
- 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. The accounting system in Poland is very complicated but at the same time – the tax authorities are very strict. The financial and accounting information should be analysed in detail to avoid surprises. The so called “creative accounting” is popular in Poland so it is important to go behind the answers and check the underlying documents like invoices or receipts.
- 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. It is vital to check the legal title to the shares because in Poland you can only buy the shares from someone who bought the shares from the legitimate owner. As a result, there has to be uninterrupted chain of transfers of shares from the very beginning.
- 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.
- Matrimonial owership of shares
- During the analysis of the legal documentation, often it turns out that the shares actually belong to both spouses as a matrimonial ownership which is a big surprise to the owners They often think that the husband who runs the business is the sole proprietor but this is not the case; the wife actually owns 50% of the business. The joint marital property is the most typical structure in Poland so whatever is earned by a couple during the marriage, belongs to the couple. This includes also the business.
- Checking the legal title to the shares requires analysis of the marital status of the owners throughout the entire period of their ownership. If it turns out that the shares actually belong to both spouses as a matrimonial ownership, then both spoused should be the party to the share and purchase agreement.
- Share and purchase agreement
- While due diligence is progressing, the parties can work on the sale and purchase agreement (SPA). 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:
- 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.
- Any price adjustment mechanisms agreed – buyers typically require the business to be left with sufficient working capital. 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. Price adjustment mechanism is not very popular in Poland because the sellers are not familiar with concept. To simplify the deal it is sometimes recommended to ignore preparation of the completion accounts.
- 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. Before the SPA is signed, the Polish owner should be informed that he 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.
- Retention of purchase price
- The retention of part of the purchase price as security for the buyer for potential breaches of warranties or indemnity is a very useful way of protecting the buyer’s interests. If the buyer has any claims as a result of untrue warranties, then he can simply deduct his claims from the retention. The payment of the price may be retained for a fixed period (say 1 or 2 years) or until expiry of the warranty limitation period. A retention should also be used where the buyer has doubts about the creditworthiness of the seller. In most cases, the buyer will not be able to enforce any claims against the Polish owner.
- These are the most important points of the Polish private acquisition. There are many more special characteristics concerning the management issues, employment issues and regulatory regimes. Naturally, a lot depends on the sector and the size of the target company. Poland is still a magnet for foreign investors and this trend will continue.
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