The areas of conflict in the sale of a company are diverse and in many cases require the involvement of a mediator. The sometimes very complex circumstances of a Corporate transaction place high professional and personal demands on a mediator. The mediator’s work can have far-reaching effects on the upstream and downstream M&A steps.

Whether a mediation or several mediations were successful during the transaction process is often only decided in the downstream post-merger integration (PMI) phase. In this phase, the actual integration or takeover of the transaction object takes place.

In practice, it has proven useful to analyse possible areas of conflict in advance when selling or buying a company.

Initial situation of a company sale

Core instruments for M&A processes and sub-processes are contracts and agreements between the parties involved. Agreements in this context are the NDA (Non Disclosure Agreement) and the Letter of Intent (LOI).

In the event that the sellers continue to act as managing directors of the sold property, new managing director agreements are necessary in addition to the purchase agreement. In this context, consultancy contracts for the sellers that are limited to the integration period are also common.

Process documents in M&A processes are regularly the information memorandum or the company exposé, the teaser for approaching interested parties, the company valuation and all company documents required in a due diligence. Since a due diligence can be very complex, we will only deal with the objects of analysis of a DD here by way of example. The consideration here is limited to the economic data, shareholder loans and business management analysis (BWA), as well as the annual financial statements.

Having said this, the following areas of conflict arise in the sale of a company.

1. conflict area NDA

The NDA is usually the first document that the seller and the prospective buyer(s) exchange with each other. The NDA ensures the confidentiality of the information to be exchanged in the further process.

The sale of a company represents a high risk for the seller at this early stage of the process: A seller discloses a lot of sensitive information about his company without a purchase agreement necessarily being concluded. For this reason, the seller has a natural interest in absolute secrecy and in limiting the circle of recipients of the information to be exchanged.

A buyer, on the other hand, must regularly communicate with advisors such as tax advisors, auditors, lawyers or his own or the external M&A department. This contradicts the interests of the seller and offers potential for conflict.

In addition, there are two further issues that can trigger a conflict. On the one hand, an NDA often includes a monetary penalty and on the other hand, an NDA stipulates that the information received must be definitively destroyed or returned to the buyer after negotiations break down.

The final destruction of information regularly proves to be complex, as prospective buyers receive most data in electronic form. Here, backup and archiving systems of the prospective buyer often take effect at an early data processing stage. For this reason, a final destruction of the transmitted data cannot be guaranteed due to the system. The reason for this is that the destruction can often not be carried out with sufficient granularity and possibly also data that is not contextually relevant would be destroyed.

2. conflict area LOI

If a genuine purchase interest crystallises, a letter of intent is negotiated by the parties. The essential function of a letter of intent is to bridge the time between a certain negotiation situation and the conclusion of the final contract. Thus, a LoI results in planning security for both parties.

The LOI is regularly seen by the parties as a preliminary parameter sheet for a company purchase. The parameters negotiated there will be included in a later purchase agreement or further negotiated.

In this agreement, which may well contain legally binding elements, the seller has an interest in parameters that are as detailed and fixed as possible in order to realise his sale successfully. The buyer, on the other hand, keeps an open mind for further options with the LOI and regularly does not agree to parameters that are backed up with figures, for example. This is particularly the case when the purchase price is fixed in the LOI.

3. conflict area vendor loyalty

Seller retention is the time commitment of the seller to the divested business for successful integration and migration into the new organisational structure

After completion of the purchase contract, the buyer faces the challenge of taking over and transferring established structures and business relationships. Since many business relationships in small and medium-sized enterprises (SMEs) are based on a personal relationship with the seller, the involvement of the seller is absolutely necessary in many cases. This is the only way to successfully integrate the customer and supplier relationships as well as the company structure into the buyer’s organisation. This can be implemented internally through a new management contract for the seller or externally through the conclusion of a consultancy contract. In this context, conflicts always arise when the parameters for advice and handover are in dispute or when the seller has no interest in working with the buyer after the closing.

4. conflict area company exposé and company value

In the preparatory phases of the M&A process, the company value is determined according to a standard market procedure, such as the IDW-S1 procedure. This value flows into the exposé of the property to be sold. The value and other key company figures are plausibly explained to a potential buyer in the exposé.

A conflict can always arise if the buyer does not consider the applied procedure for determining the enterprise value to be applicable or if a calculation factor is disputed because it has a direct impact on the enterprise value. In addition, there are other soft factors from the exposé that at least provoke a need for discussion. These often include the presentation of the market analysis and the expected future profits, as well as the company’s ability to grow.

5 Conflict area economic data

The hard facts of the enterprise only form an area of conflict if their origin has not been calculated conclusively or coherently. In particular, the BWA, the list of totals and balances (SuSa) and the annual financial statements should be mentioned here.

The BWA in particular represents a major area of conflict, since the current business year is considered here and the figures can deviate from the finally approved annual financial statements.

Furthermore, the listing of shareholder loans should be mentioned in this context, the effects of which can also have retroactive effects on the company successor, for example in the context of a tax audit by the tax authorities. The conflict in this case often revolves around the repayment modalities by the former shareholder or the deduction of the sum from the purchase price.

In the next article we analyse the possible roles and uses of a mediator in corporate transactions.