Sale of the Company refers to the process of transferring the management rights or business of a company to a third party in exchange for compensation.
In recent years, the sale of small and medium-sized enterprises (SMEs) has been on the rise, primarily aimed at solving succession issues and promoting business growth. Business owners facing various challenges, as well as those who are not, can make more informed management decisions by understanding the procedures and benefits of company sale.
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This article explains the basic knowledge of the company sale process, as well as points to pay attention during the process, along with its advantages and key points to note.
# What is a Company Sale? Trends in Company Sale
A company sale refers to the act of selling all or part of a company’s management rights or business in exchange for compensation. When people hear about company sale or M&A (mergers and acquisitions), they might imagine acquisitions between large companies. However, there has been an increase in SMEs executing company sale as part of their business strategy.
Specific situations in which SMEs consider a company sale include “the absence of a successor, necessitating the search for an external successor” and “feeling limitation for organic growth as a standalone and seeking to partner with another company.”
# Methods of Company Sale
Company sale can generally be categorized into share transfers and business transfers, but in the case of SMEs, share transfer methods are more commonly used.
Share transfer involves the seller (shareholder) transferring their shares of the company to the buyer. The seller receives compensation for the shares transferred, and the buyer acquires the right to manage the company.
# Mechanism of Share Transfer
Share transfer is a straightforward procedure that completes M&A process, and since the transferor receives compensation, share transfer is often chosen for M&A involving medium-sized and small enterprises.
# Differences from Business Transfer
The process of selling the business itself to a third party is called a business transfer.
Unlike share transfer, business transfer requires permissions to novate individual contracts with suppliers and clients as well as the transfer of employees. As a result, the procedure tends to be complex; however, it allows for flexible options, such as selling only part of the business.
If you wish to retain only the minimum manageable business or want to separate debts and risks that might deter buyers, a business transfer may be the option.
# Benefits of Company Sale
There are four (4) main benefits for SMEs when selling their company. Let’s take a closer look at each.
1. Brand and legacy can continue to exist
When managing the company becomes challenging, transferring it to a new management allows the company itself to continue existing. In the case of company sale involving SMEs, many are friendly M&A transactions, preserving employee employment and maintaining relationships with business partners. Additionally, with prior contractual agreement, the seller can continue to be involved in the business even after transferring the ownership.
2. Leveraging the management resources of the buyer
By executing a company sale, the seller can leverage the management resources of the buyer, including assets, personnel, technology, and customer base, to achieve business growth that was difficult to accomplish alone.
If the branding of the buyer is strong, it can have a positive impact on recruitment. It’s not uncommon to see cases where talent acquisition becomes easier after the transfer.
3. Monetizing your years of efforts
When a company is sold through share transfer, the seller receives compensation. This compensation can be used to begin a fulfilling life with family, thus broadening the options for a second life.
4. Personal guarantees can be lifted
When a company is sold, the personal guarantees of the owner are lifted.
The lifting of personal guarantees typically involves negotiations and procedures with the buyer or financial institutions, whereby the buyer takes on the loan or assumes the guarantee itself.
Additionally, due to the transfer of management rights, the owner can step away from the heavy responsibility of carrying the business alone and focus on personal strengths.
# Points to Note in Company Sale
While there are benefits to selling a company, there are also important considerations to keep in mind. Make sure to check these beforehand to avoid regrets.
Possibility of Lock-Up
A lock-up (key person clause) is an agreement requiring key individuals on the seller’s side, such as the owner or key management personnel, to remain with the company for a specified period after the acquisition.
This is established to ensure a smooth business transition after the acquisition and is generally set for a period of up to three to five years, depending on the scale of the business.
During this period, there may be restrictions on freedom regarding new business developments and personal investments in competing companies, so caution is advised.
No competing business for a specified period
After selling the company, the seller is obligated not to engage in “competing business activities” related to the business which was sold. This is called a non-compete obligation, and it is established to prevent the buyer from suffering disadvantages.
Unable to sell at your desired timing
To realize a company sale, it is necessary to find a buyer and finalize negotiations, but such processes typically take a considerable amount of time.
Moreover, if there are non-negotiable conditions for either the seller or buyer, or if the lack of knowledge on both sides prevents finding a suitable optimization, or if it’s difficult to find a buyer that meets the criteria, unexpected time and effort could be required for the company sale.
Conclusion
Acquiring sufficient knowledge and start preparing well in advance, as well as seeking support from professionals are critically important for successful transaction. If you need any assistance, feel free to contact Nihon M&A Singapore.
