[This is an English translation of an article originally published in Czech.]
“Selling a company or bringing in an investor can represent a major opportunity for a business, but also a risk,” says Luděk Skoupil, a partner at the Tarpan Group consulting group and Managing Partner of the Tarpan Legal law firm.
Whether the transaction involves a sale or the entry of an investor, it is essential not to rush it, as it represents a change entirely outside the ordinary course of a company’s life. A carefully prepared process will increase the company’s value while also ensuring that the business does not fall into the wrong hands.
“Small and medium-sized companies are often closely connected to their founders, both commercially and in terms of management. This is another reason why preparing the transaction in good time is important,” says Skoupil, one of the founding partners of Tarpan Group and an experienced transaction lawyer who has gained experience in private equity and venture capital and specialises in transactions and structured finance.
It is essential to establish a suitable management model, including its financial aspects, and to prepare business partners and employees for the change.
“The key role of an experienced adviser lies not only in negotiating the best price for the sale of the stake, but above all in preparing well-considered terms for the entire partnership. Managing the expectations of everyone involved effectively is important so that negative surprises and frustration leading to conflict do not subsequently arise,” adds Petra Coufalová, a lawyer at Tarpan Legal.
The lawyers at Tarpan Legal have extensive experience in preparing transactions and creating corporate structures. The law firm is part of Tarpan Group, as is the consulting firm Tarpan Partners, whose team has advised major market players in the Czech Republic and elsewhere since 2009.
“In every transaction, we always prepare for a wide range of scenarios so that we can provide clients with a solution in any situation,” Luděk Skoupil notes. “The foundations of high-quality documentation include not only the financial parameters of the transaction, but also clearly defined roles for the partners, the extent of their involvement over time and realistic assumptions regarding further development,” Petra Coufalová adds.
Together, the lawyers describe the most common problems in relationships between company owners and how they can be prevented.
Sale of part of a company
Finding a suitable partner when selling a stake in a company may take months or even years. According to the lawyers, the new shareholder’s vision for the company’s future direction must not conflict with the existing owner’s underlying intentions.
A solution should nevertheless also be available if the shareholders’ visions subsequently diverge.
“When a partner enters a company, it is essential to clarify the powers of the existing and new shareholders and their respective roles in managing the company,” Skoupil explains.
As an example, he cites an established medium-sized manufacturing company whose founder decided to find a partner to help professionalise its management and support the business’s continued growth. The investor acquired a majority stake with the right to acquire up to 100 per cent at a later stage. But a problem arose.
The existing owner rejected the new management model, under which he no longer made all decisions about the company’s operations himself. “The already rather dominant original owner began making decisions behind the new owner’s back, thereby harming the investor – and, consequently, the company itself – and jeopardising its continued operation,” Luděk Skoupil explains.
The situation was resolved by high-quality contractual documentation, which enabled the investor to leave the company without incurring a financial loss. “The investor exercised an emergency put option to sell the stake back and left the company,” Skoupil explains.
“It is necessary to identify in advance the appropriate areas for joint decision-making, whether they affect the company’s strategy or its current value directly,” Coufalová explains. “Option mechanisms applicable in the event of a conflict include the right to sell one’s stake or, conversely, to require the other party to sell theirs,” Skoupil adds.
Entry of a financial investor
A difficult situation may also arise when a minority shareholder, such as a financial investor, enters the company. This typically concerns start-ups seeking capital for further development without their founders relinquishing control.
The lawyers at Tarpan Legal also have direct experience of this situation. “A start-up founder entered into an agreement with an investor who acquired a minority stake. The situation subsequently became more complicated: the company grew more slowly than planned and required additional investment,” Skoupil says, describing the origins of the problem.
The investor was willing to provide the company with further support but wanted a larger stake in return. The founder disagreed, blocked the investment and the company began heading towards insolvency.
The financial investor was ultimately forced to buy out the original owner and assume control of the entire start-up. “In the end, nobody won. The entire situation was caused by inadequate expectation management, a lack of transparency and the founder’s unrealistic expectations,” the lawyer adds, noting that similar situations are not unusual when a transaction has not been prepared adequately.
Joint venture
Similar cases do not arise only when a new shareholder enters a company. A rift may also develop between two owners who have managed a company for years without significant problems – and without signed agreements.
“We handled one such dispute that destabilised what had previously been a stable manufacturing company. It ultimately led to key decisions being blocked and the threat of complete paralysis. The only possible solution was to divide the business or buy out one of the owners,” Skoupil explains.
Negotiating any agreement only after a dispute has arisen is, however, always exceptionally complicated. “It is therefore essential to anticipate different scenarios, including the worst ones, from the outset,” Petra Coufalová emphasises. Agreements should always be concluded ex ante – in advance, at a time when this can be done calmly and without negative emotions.
According to the lawyers, all the situations described share a common denominator: selecting the counterparty correctly and assessing the emotional and non-financial terms properly are at least as important as negotiating the financial parameters of the transaction. “You need to draw on experience, think everything through, prepare for different development scenarios and estimate their probability. It is not only about logic, calculations and contracts; psychology also plays a major role,” Luděk Skoupil concludes.
20. 11. 2023