Privately owned / family business
In November 2022, we will be celebrating the 33rd anniversary of the Velvet Revolution. This milestone in Czech history brought not only political liberties, but also the freedom to conduct business. The first generation of Czech entrepreneurial pioneers will soon reach retirement age and are looking to hand over their businesses to their heirs or sell the businesses outside of their families.
Conversely, acquisition of a Czech privately owned/family business has several specific aspects that one needs to take into account when weighing such a purchase.
Aspects of management
As a leader and visionary, the founder of a Czech privately owned family company is typically not only the sole shareholder, but also usually serves as the day-to-day business executive of the company. Professional management is engaged only in rare cases. This stems from the fact that founders had to manage their companies by themselves from the very start, as there were no qualified outside managers. A certain lack of trust is also present.
It is necessary to take these unique management aspects into account, as the founder often possesses vital know-how vis-à-vis the company which is not easy to transfer to the new owner. Therefore, we would recommend a smooth acquisition model with (i) at least a one-year transition period and (ii) legal counsel with specific skills who can delicately handle any unusual elements stemming from the combination of heightened sentiment, high expectations, negotiation style, specific values and the given company’s legacy.
Lack of experience with the M&A process
The sale of a company is usually the sole event during which the founder deals with the M&A process. Founders frequently hesitate to cooperate with upper-tier M&A advisors and lawyers and have a tendency to manage the transaction exclusively with the support of their day-to-day/commonly retained lawyer. This may lead to misunderstandings and disenchantment due to inadequate experience with the M&A process.
From our experience, it is critical to explain to such sellers the purpose of an SPV, the workings of the due diligence process, the standard terms and conditions of an M&A deal and the structuring of the share purchase agreement.
Moreover, it is probable that the company’s internal management and the related rules will need to be rearranged or even established from the ground up.
The fine line between business and private life
Founders usually live for their businesses, which thus form an integral part of their lives. This may cause them not to appreciate the boundary between the business and private ownership. Eventually, companies may hold a great amount of assets not related to their core business. Moreover, companies usually hold cash from the profits of the preceding years because the owners pay dividends only in the amounts necessary to satisfy their needs.
This cumulative approach results in the necessity of carrying out pre-transaction process carve-outs by experienced M&A advisors or lawyers.
Understandably, owners who have built up their companies over the greater part of their professional lives care about the future of their companies even after they exit. To avoid any misunderstandings, it is advisable to sit down with the owner and discuss future changes such as post-acquisition mergers, renaming of the company or relocation of the seat and back office and – perhaps most importantly – any resulting dismissals of employees.
This emotional block might be even greater when the purchaser happens to be a foreign entity. In such a case, the presence of experienced M&A advisors is of the utmost importance.
Right now is the best time to acquire privately owned/family businesses. A large number of solid mid-size companies are or will be up for grabs as the first generation of founders/owners reaches retirement age and begins exploring their exit strategies.