Many factors contribute to a successful company sale. In an online roundtable discussion, we discussed these factors with strategic and financial investors, and also considered a few factors from the possible legal toolkit.
When it comes to selling a company, many people decide in advance “how much they would like to receive” as the purchase price. It is undoubtedly worth setting goals in advance. However, just as in the case of a property that we built or renovated ourselves, it can lead to disappointment if we determine our price expectations based on our personal wishes. This is because it is primarily financial and profitability indicators that determine whether the company in question, viewed from the outside through the eyes of a potential buyer, has the characteristics that justify a significant company value, says Zoltán Krausz, an expert in company building and preparing businesses for sale.
„In the case of a Hungarian small or medium-sized enterprise, the stakes may amount to a purchase price difference of several hundred million forints, so it is worth dealing with the issue.”
According to Zoltán Krausz, the two most important aspects when assessing a company are the stability of its financial indicators, as well as its level of profitability and the size of its revenue. Perhaps one of the most important factors is how predictable the company’s profitability has been in the recent past. Interested parties typically review the previous three years and will primarily evaluate positively if the company’s revenue and profit levels have been stable or, in the case of growth, have moved more or less in parallel. Unique, outstanding values always raise questions. This is not necessarily negative, but the departure of a key customer, resulting in a serious decline in profit, raises the possibility of this happening again in the future and its impact on company value.
It is also highly significant how much profit a company can generate from HUF 100 of revenue. A company operating at an operating profit level of only a few percent will less often be attractive to financial investors. In the case of such businesses, the size of the revenue or the company’s performance compared to its competitors often carries greater importance. Interested parties are more likely to come from the strategic side, for example as competitors or foreign companies operating in a similar industry. Companies operating at a high profit level, or showing significant year-on-year growth, may, in addition to strategic investors, be much more likely to attract the interest of financial investors.
As a strategic investor, however, Viktor Szekeres also considers numerous subjective circumstances during the acquisitions of Gloster Infokommunikációs Nyrt., such as integration and mobilization. An important aspect is whether the employees of the company to be acquired can work together with the team of Gloster Infokommunikációs Nyrt. at its headquarters in Nagytarcsa, which is of particular importance from an HR perspective.
„Besides subjective circumstances, we naturally also pay attention to whether the given company’s profit-generating ability is based on real facts. In such cases, we always review the company’s accounting records. We have already had an experience where intangible assets were capitalized in the seller company, which increased the company’s EBITDA. We therefore believed that this technical solution should not be reflected in the purchase price.”
Further seemingly subjective questions may also arise, the assessment of which may go beyond the scope of a legal due diligence review, said dr. Róbert Vámosi, partner at dr. Pintér Attila Law Firm. In his view, in lower-value company sales, it sometimes happens that the company’s customers are connected to the company’s ownership circle. Accordingly, a change of ownership carries significant risk as to whether the customers will remain with the new owner after the acquisition.
Another important aspect is the duration of the contracts held by the company to be sold.
„A buyer is willing to pay for predictability.”
One of the strongest positives in this respect may be if the contracts concluded with partners guarantee the continuation of the relationship for 2–3 years after the transaction, or even longer. Since many contracts include a condition that the partner may terminate the agreement in the event of a change of ownership — a change of control clause — the seller can further improve its position if it undertakes to obtain the necessary waivers in a sale process, or already takes this into account when entering into contracts.
In addition to the transparency of legal processes, the issue of customer concentration is another important aspect, said Zoltán Krausz. “Recently, during a conversation with a seller, it turned out that 80–90% of the turnover of his successfully operating company came from two foreign customers, one of whom was owned by a childhood friend, while the other was based on a decades-long business relationship rooted in friendship.
If two customers account for such a large share of the turnover, the loss of one customer may shake the entire company.
As a result, those interested in the sector will value more highly those companies where the Top 10 customers are less dominant within the entire customer base.”
Customer concentration also represents particularly high added value in the acquisitions of Gloster Infokommunikációs Nyrt., while another financially important aspect for Gloster Infokommunikációs Nyrt. is the opportunity for cross-selling, said Viktor Szekeres. An acquisition creates an opportunity for the parties to sell each other’s services to each other’s customers, which may ultimately further increase the value of the deal.