Control over the takeover process: avoid these pitfalls during a share transfer

A business transfer is an intensive and complex process with significant stakes. In this blog post, we discuss some pitfalls transferors might fall into and how to avoid them.

1. Don’t Share Confidential Information Without an Agreement

Initial talks with a potential buyer are often informal. There's interest but no concrete acquisition process yet. Sometimes informative notes are exchanged containing revenue figures, key clients, suppliers, or personnel. If the acquisition falls through, the potential buyer might contact these connections. This not only harms the business but could also lead to liability if confidentiality obligations were breached or personal data was exchanged without consent. Ensure a confidentiality agreement is in place with a non-solicitation clause and appropriate penalties.

2. Prepare for Due Diligence

Potential buyers, including those from an oil company or a private equity firm, will request a lot of (legal, financial, commercial,...) information on short notice. Be prepared as a transferor. Poor bookkeeping, faulty administration, or legal irregularities may cause a potential buyer to back out or renegotiate. Get guidance from professional advisors who can identify risks in advance so you can address them before the due diligence process begins. A 'vendor due diligence', requested by the selling party instead of the buying party, can also offer valuable insights about your own business.

3. Avoid Unnecessary Publicity About the Transaction

Negotiations for an acquisition are preferably kept quiet. Internal or external publicity can harm the transaction. Hence, a project name is often used. Use a specific and personal email address for all communications that staff cannot access, and exchange contact details directly with the advisors involved in the case.

4. Don’t Let Time Pressure Be a Constraint

An average acquisition process takes roughly 6 to 12 months. Consider thorough preparation (see point 2), an unexpectedly lengthy financing process on the buyer's side, obtaining information or approvals from third parties, and other possible unforeseeable circumstances. Those under external time pressure due to age, health, or approaching end of ongoing contracts may tend to make concessions quicker during negotiations. Thus, establish a realistic and flexible timeline at the start of discussions.

5. Avoid Silent Contracting

An acquisition agreement can arise ‘silently’. It’s not required for the parties to have a definitive agreement on all elements in writing. In principle, a share sale is concluded with an agreement on the subject, which are the shares, and the price. Be cautious with informal email exchanges confirming a price agreement. This could lead to the ownership of the shares transferring, with the seller only entitled to the sale price. Always use a letter of intent that clearly outlines the timing of ownership transfer. Additionally, negotiations can take place via confidential communications between lawyers to mitigate this risk.

6. Don’t Focus Solely on the Price

A prospective seller usually starts with a certain price expectation. A strategic buyer might leverage this by linking a high price to an earn-out. This structure makes part of the payment contingent on meeting certain future goals. Our advice to the transferor is to limit this as much as possible, as the company's fate is no longer solely in their hands post-acquisition. Equally important is protection against future liabilities. If the seller must provide extensive warranties without market-standard limitations, part of the purchase price might not yet be secured. For your peace of mind, consider the overall conditions.

A business transfer is an intensive and complex process with significant stakes. In this blog post, we discuss some pitfalls transferors might fall into and how to avoid them.

1. Don’t Share Confidential Information Without an Agreement

Initial talks with a potential buyer are often informal. There's interest but no concrete acquisition process yet. Sometimes informative notes are exchanged containing revenue figures, key clients, suppliers, or personnel. If the acquisition falls through, the potential buyer might contact these connections. This not only harms the business but could also lead to liability if confidentiality obligations were breached or personal data was exchanged without consent. Ensure a confidentiality agreement is in place with a non-solicitation clause and appropriate penalties.

2. Prepare for Due Diligence

Potential buyers will request a lot of (legal, financial, commercial,...) information on short notice. Be prepared as a transferor. Poor bookkeeping, faulty administration, or legal irregularities may cause a potential buyer to back out or renegotiate. Get guidance from professional advisors who can identify risks in advance so you can address them before the due diligence process begins. A 'vendor due diligence', requested by the selling party instead of the buying party, can also offer valuable insights about your own business.

3. Avoid Unnecessary Publicity About the Transaction

Negotiations for an acquisition are preferably kept quiet. Internal or external publicity can harm the transaction. Hence, a project name is often used. Use a specific and personal email address for all communications that staff cannot access, and exchange contact details directly with the advisors involved in the case.

4. Don’t Let Time Pressure Be a Constraint

An average acquisition process takes roughly 6 to 12 months. Consider thorough preparation (see point 2), an unexpectedly lengthy financing process on the buyer's side, obtaining information or approvals from third parties, and other possible unforeseeable circumstances. Those under external time pressure due to age, health, or approaching end of ongoing contracts may tend to make concessions quicker during negotiations. Thus, establish a realistic and flexible timeline at the start of discussions.

5. Avoid Silent Contracting

An acquisition agreement can arise ‘silently’. It’s not required for the parties to have a definitive agreement on all elements in writing. In principle, a share sale is concluded with an agreement on the subject, which are the shares, and the price. Be cautious with informal email exchanges confirming a price agreement. This could lead to the ownership of the shares transferring, with the seller only entitled to the sale price. Always use a letter of intent that clearly outlines the timing of ownership transfer. Additionally, negotiations can take place via confidential communications between lawyers to mitigate this risk.

6. Don’t Focus Solely on the Price

A prospective seller usually starts with a certain price expectation. A strategic buyer might leverage this by linking a high price to an earn-out. This structure makes part of the payment contingent on meeting certain future goals. Our advice to the transferor is to limit this as much as possible, as the company's fate is no longer solely in their hands post-acquisition. Equally important is protection against future liabilities. If the seller must provide extensive warranties without market-standard limitations, part of the purchase price might not yet be secured. For your peace of mind, consider the overall conditions.