“Negotiation of the SPA is the last and key stage in the acquisition of companies. It is a comprehensive document that defines the final terms of the takeover for the buyers, where even one sentence can negatively affect an otherwise successful transaction and vice versa,” said Miroslav Svoboda, Partner at Tax&Legal, Deloitte. The SPA should reflect the findings of financial, tax, legal and other audits of purchased companies (due diligence).
When using closing accounts, the supplementary payment or overpayment of the purchase price is determined after the preparation of the financial statements based on the amount of net working capital and net debt at the date of the company’s takeover by the new owner. The purchase price thus represents the value of the company at the date of the takeover more accurately.
In almost a third of transactions (29%), the price was determined by the so-called locked box, i.e. a fixed price based on data from the latest available financial statements, often several months old. This form is used more frequently when selling larger companies and is preferred especially by sellers.
“It turned out that in a third of cases the valuation of the company at the date of the locked box was sufficient for buyers even though the numbers were not audited. The advantage of this mechanism is less administrative complexity, as there is no need to prepare financial statements at the transaction date,“ said Dušan Ševc, Partner at Financial Advisory Services, Deloitte.
Half of the deals were settled immediately
Approximately half of the deals assessed in the Deloitte study were fully settled at the time of takeover by the buyer (45%), while 55% received part of the purchase price after a certain period of time provided that the pre-agreed conditions were met. In some cases, the seller was entitled to a part of the purchase price only after the company achieved certain financial results (so-called earn-out).
“In recent years, earn-outs have been agreed for 17% of transactions and linked to the EBITDA performance indicator to be generated in the following period of up to three years. At the same time, it is gaining in popularity, especially in uncertain times, which is why we now expect it to be used more often,” added Dušan Ševc.
The study also showed agreement on the approach to sellers’ liability for the condition of the company being sold. In the vast majority of transactions (94%), the sellers provided guarantees for the company’s condition to the extent to which the buyer was not informed of the company’s condition through the information and documents provided.
“Performing a regular audit of the company is crucial. Only on the basis of such an audit is the buyer able to get a comprehensive picture of the company’s state, its value, and possible risks. However, not all risks can be reflected in the purchase price, especially if the identified risk has not yet occurred. Therefore, in approximately three-quarters of the cases assessed, the seller undertook to indemnify the buyer if the identified risk manifests itself after the settlement of the transaction,“ added Jan Kotous, Partner at Deloitte Legal.
In disputes, the parties prefer arbitration
The study also looked at how disputes are resolved. Transaction disputes are in most cases (59%) dealt with by local or international arbitration courts, which are generally preferred over state courts.
The complete Deal making in the Czech Republic study may be downloaded here.
3rd February 2021