Selling a business in Slovakia: when is the right time and why transactions most often fail

The right time to sell a business does not exist as a one-size-fits-all dictum. In practice, it is triggered either by a specific offer from an investor or by an internal situation in the company- typically a generational change or an agreement of the shareholders to bring in an investor. In this article, we summarize practical “M&A” experience from the Slovak market: how the sale process works, where owners most often lose time and value, and what you can do to ensure that the transaction does not fail based on an unrealistic idea of price, terms and conditions, or unpreparedness for due diligence.

When is the right time to consider selling the company

From a practice perspective, “right time” is most often divided into two groups of triggers:

External triggers

• an investor comes in and offers terms that are acceptable to the owners,
• the sector in which the company operates has momentum and companies with a given product/service are “on the radar” of buyers (e.g. e-commerce during the COVID 19 epidemic).

Internal triggers

• generational change (in Slovakia this is becoming more and more frequent, as the founders from the 1990s naturally reach the point where they are dealing with succession),
• owner fatigue or disagreement, change of strategy, need for capital or an external partner (investor) to continue growth.

Practical note: pragmatism often wins in Slovak realities. Many transactions only get off the ground when there is a concrete investor’s offer “on the table” and the owner realizes the complexity of the sale and the fact that he will need a professional advisor in the process.

How to find a buyer: Strategist vs. financial investor

The basic division of buyers is simple, but critical to the process:

Strategic investor

• typically a player from the same or a related industry,
• often looks for synergies (market, product, distribution, team),
• can also pay “strategic value” for a business, not just a purchase price based solely on financial performance.

Financial investor (private equity / other financial investors)

• works with the investment thesis, return and risk,
• Often addresses platform investment (the company is the foundation on which the group is built),
• structuring the price over time (earn-out, deferred payments, reinvestment) comes very standard.

In professionally and standardly conducted sales processes, both groups are approached in parallel. This increases competition, improves the bargaining position of the owners and often the final price or terms.

Three stages of the sales process that every owner should know

In practice, the process can be broken down into basic stages:

1. Preparation and “marketing” of the company

This is where most of the work is done that is not visible from the outside, and where most of the value is created.

• getting to know the business, the team, the key numbers (typically at least 1-2 years),
• preparation of marketing documents and presentations for the investor:
  • Teaser (brief investment trailer),
  • Information memorandum (more detailed material – often dozens of pages),
• sometimes vendor’s due diligence (i.e. the company’s own financial and legal due diligence to identify and correct weaknesses before sale)
• The aim is to get non-binding offers and a framework agreement on terms (term sheet) from a larger number of investors (buyers).

2. Selection of a shortlist of candidates

On the basis of the non-binding bids submitted, a number (auction process) or a single bidder is selected with whom negotiations continue on a temporary exclusivity basis

3. Due diligence

The buyer examines with his financial and legal advisors the company’s affairs and status: finances, taxes, law, and in some cases technical or environmental aspects. Due diligence will reveal whether the company:

• has an orderly accounting and tax system,
• has sufficient contractual support for cooperation with business partners and employees,
• does not have “skeletons” that can reduce the purchase price or stop the transaction altogether.

4. Negotiation and transaction documentation

The finale tends to be the most intense: Preparation and negotiation of transaction documentation. In the case of a sale of the entire stake, a framework agreement for the transfer of shares in the target company is negotiated. If the owners retain a minority stake in the company, the documentation includes a new shareholders’ agreement (or shareholders’ agreement) governing the relationship between the shareholders after the investor’s entry.

Why transactions fail most often

From the experience on the Slovak market, three reasons prevail:

1) Mismatch in expectations about the purchase price
Owners naturally have an emotional attachment to the company. However, subjectively perceived value does not match market value in most cases. Therefore, it helps to have an independent valuation (valuation report)that sets realistic expectations for the owners before the sale.

2) Unresolved Transaction Terms
Even if the parties agree on the amount of the purchase price, the deal can fall down on:

• the payout structure (how much at the close of the transaction and how much later),
• earn-out (deferred portion of the purchase price) and its terms (often EBITDA),
• the scope and limits of representations and warranties about the state of the firm,
• reinvestment terms (the seller remains a minority shareholder in the group).

3) Unpreparedness of the company and stretching due diligence
Slovak companies are often “below the radar”, excellent product or service, but weaker back office. Investors from Western Europe, however, expect detailed data, a plan, a tidy company. If due diligence takes an unreasonably long time, or if the investor identifies a number of fundamental flaws, they often push for a reduction in the purchase price.

Slovak specificity: sell the company myself

The Slovak market often resonates with a specificity, which is the frequent effort of owners to “sell it yourself”. Selling a company is not rocket science, but it has specific risks and negotiation situations that are difficult to prepare for without practice, and the experience of consultants with similar sales helps a lot. This is where there is room for financial, tax and legal advisors with relevant experience of the transaction process. In many cases, an experienced advisor can protect a significant part of the value of the company for its owners.

What we recommend at Highgate Group

If you’re thinking of selling or investing, these steps make sense:

• to get a realistic picture of the value of the company (independent valuation),
• prepare the company for due diligence (accounting, tax, legal, procedural),
• Set “deal readiness”: what we want, what we can accept, where the limits are,
• deal with the tax and legal aspects of the share sale upfront (not only when the term sheet (investor’s offer) is on the table).

At Highgate Group, we combine law, tax and accounting, and it is this synergy in transactions that typically saves time, reduces risk and improves the negotiating position.

You can watch the full podcast on this topic here:

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If you are interested in this topic, please do not hesitate to contact us:

• Tomas Demo, e-mail: tomas.demo@highgate.sk

Alternatively, you can address your specific questions in a consultation with our partner Tomas Demo. You can book a consultation here: