Main challenges in venture capital transactions and M&A in Spain

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AGM Abogados

Mercantile practice in venture capital transactions and the acquisition and sale of small and medium enterprises (SMEs) in Spain tends to follow the UK-US standard procedure for these types of transactions. This type of procedure has the following steps: (i) initial contact, (ii) confidentiality letter, (iii) letter of intent, (iv) due diligence and (v) sale/purchase contract (and partner agreement, especially for venture capital).

In Spain, because of the size of its market and the predominance of SMEs, the usual mercantile procedure is sometimes not carried out in full detail. Although sometimes this is due to the lack of knowledge of the persons making the transaction decision, in most cases the shortcomings are because they wish to reduce costs such as legal and financial advisors and service providers.

In these types of transactions, where company acquisitions tend to be carried out by SMEs and small family offices or whose main activity focuses on the property market, and where venture capital transactions tend to be performed by business angels and small venture capital firms regarding seed and growth rounds, there are shortcomings in terms of control of the confidential information.

The main shortcomings we observe in practice are as follows:

  • Not following the aforementioned ordinary procedure by skipping steps, such as the confidentiality letter or the letter of intent, and formalising those documents using simple forms. This problem arises because it is believed that starting the negotiations directly with the sale/purchase contract or buying a stake will save time, when this will normally lead to more tension and failed agreements which should not have even been started. The letter of intent must be drafted before starting the due diligence so that, if the main parameters to be negotiated cannot be completed at that time, the company will not submit more confidential information than that strictly necessary for preparing an initial appraisal.
  • Not filtering or controlling the confidential information. This problem is especially serious as a result of using shared spaces on the net or when the information is sent by email, where the party providing the information does not have any control over what is done with the documentation delivered. Although hiring trustworthy providers has a high cost, the use of free or low-cost systems has serious consequences for the company sharing the information. This is clearly where the main mistakes are made, since there is no awareness of the lack of control generated by sharing information on the Internet, especially when it is shared with third parties whose sale/purchase or investment agreement may not be completed successfully.
  • Not controlling the documentation sent and received by the parties, both during the transaction and after completion of the sale/purchase or investment round. This generates problems when formalising the agreements and managing the company after completing the transaction.
  • Not controlling the uneasiness generated among the staff when finding out that the company is being transferred to a third party. In this case, the best thing to do is not reveal the start of the procedure to anybody who does not need to know it so that the transaction can go ahead. Moreover, in Spain the weighting of family enterprises and the closed nature of the companies may aggravate the problems with the staff in these situations.
  • Losing contracts with clients and suppliers due both to the staff uneasiness and the loss of business focus. This occurs especially when third parties are hired to deal with the transaction and tends to have more impact on start-ups focused on carrying out investment rounds where there is a lack of staff to deal with both the day-to-day business and the transaction in question.

A version of this article was published in Emprendedores. Read it here.

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