Transaction negotiation in the Czech Republic
When selling a company, closing accounts is the most common type of a price agreement
When selling a company in the Czech Republic, counterparties tend to prefer to determine the purchase price on the basis of the financial statements prepared as of the date of the company takeover by the new owner, i.e. the closing accounts. After the financial statements are prepared, the supplementary payment or overpayment of the purchase price is set based on the amount of net working capital and net debt as of the date of the takeover by the new owner. The purchase price thus represents the value of the company as of the date of the takeover more accurately. Within SPA negotiations (Share Purchase Agreement), this form of purchase price determination was chosen for 71% of transactions. This results from the latest Deloitte Deal Making in the Czech Republic study that summarised selected data from significant transactions of recent years.
“SPA negotiation represents the last and key phase during company acquisition and should reflect the findings of financial, tax, legal and other due diligence. 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.”
Miroslav Svoboda, Partner in the Tax function of Deloitte
Key findings of the study:
- 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.
- 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 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.
“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 frequently.”
Dušan Ševc, Partner in Financial Services of Deloitte
„It is crucial to conduct a proper due diligence. Only on its basis 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.”
Jan Kotous, Managing Partner at Deloitte Legal