How to prepare a company to attract a strategic investor

Mainstream

Attracting a strategic investor is not just about selling a stake in a business. This is a strategy to increase the company’s capitalization.

The question is not how much the company is worth. The main question is why the investor should pay the proposed price for it and why he will believe that after the transaction he will not receive hidden risks.

Therefore, effective preparation for the transaction begins with three checks:

• Is the business legally and financially transparent?
• Where and what risks will the investor see when checking?
• How the structure of the company affects the possibility of conducting a transaction and withdrawal of funds.

If these three issues are not resolved before the start of negotiations, the owner risks facing a significant discount to the price, delaying the process or failure of the investor at the final stage of due diligence.

When it comes to attracting a strategic investor

Preparation of the company to attract a strategic investor is relevant if:

• The owners are planning a partial or complete exit from the business.
• The company has reached the growth ceiling and needs a partner to scale.
• Industrial expertise, new markets or technologies are required.
• business is preparing for consolidation with a major player in the industry;
• It is necessary to strengthen the balance before expanding into new regions (including the CIS, Asia, the Middle East);
• Current shareholders want to fix the value of the business and attract a partner for pre-IPO preparation.
• The company has attracted the attention of a large industry fund or an international holding company.

The mistake most owners make

Many owners start with the question:

What is the maximum price you can get?

That's the wrong first question.

The right question is:

What risks, related to the structure, assets and history of the business, will reduce its value or block the transaction?

Sometimes the best result is a pre-sale restructuring. Sometimes, the allocation of non-core assets. Sometimes, it is necessary to eliminate compliance violations before due diligence. Sometimes it is the creation of a transparent corporate structure from scratch.

Attracting a strategic investor does not require business marketing, but strategic legal and tax preparation.

Step 1. Checking the corporate structure

The first thing that an investor studies is not revenue or EBITDA, but ownership structure.

Key points of verification:

• chain of ownership from the ultimate beneficiary to the operating company;
• jurisdiction of holding companies;
• availability of offshore instruments (trusts, foundations, partnerships);
• Corporate agreements and shareholder agreements;
• double the functions of the sole executive body;
• Authorities of signatories on key transactions;
• Registered encumbrances, options and restrictions;
• history of dividend payments and intergroup loans.

If the structure is confusing, opaque, or contains companies with no economic sense, the investor will either require costly restructuring or discount the value of the asset.

Step 2. Conduct a title audit for key assets

For a strategic investor, it is critically important what exactly the operating model of the business rests on.

Rights to:

• real estate and land;
• production facilities and equipment;
• trademarks, patents, know-how;
• Software and domain names;
• licenses, permits, quotas;
• Key contracts with suppliers and customers;
• rights to subsoil use or natural resources (depending on the industry).

Gaps in the title chain, unregistered contracts, IP objects issued to affiliated individuals, or licenses tied to a structure that will change are all direct grounds for price revisions.

Step 3. Eliminate the risks of personal dependence of the business

The classic problem of companies in the post-Soviet space is business tied to the identity of the owner.

The investor checks:

• Whether the key relationship is closed to one person;
• whether there is a critical dependence on personal connections with regulators, suppliers or customers;
• Whether operational functions are transferred to the hiring management;
• How formalized are business processes and decision-making systems.

A business that cannot function without a founder is much cheaper than a business with a well-established corporate governance system.

Step 4. Conducting tax and financial due diligence

Investors do not believe in management reporting. He needs a verified painting.

It is mandatory to prepare:

• Audited financial statements (at least three years);
• analysis of tax history and unresolved disputes;
• Checking transfer pricing within the group;
• history of tax audits and additional charges;
• analysis of revenue structure in terms of jurisdictions;
• assessment of compliance with the CFC rules (for Russian beneficiaries);
• Currency control and compliance with the requirements of the Central Bank of the Russian Federation.

Strategic investors, especially those with international participation, almost always require tax guarantees and risk insurance. The cleaner the story, the less reason for bargaining and the faster the deal.

Step 5. Selecting exit strategy and transaction structure

Direct sale of shares

Classic deal. Suitable if the ownership structure is simple and clear, and the risks are minimal.

Structured through option

It is used if the investor wants to fix the current price but postpone the full entry until certain KPIs are met.

Setting out targeted business

Effective when a group has non-core, problem or sanction assets that should not be transferred to the investor.

Joint Venture (Joint Venture)

It is applied if the parties plan to jointly develop the business, rather than completely withdraw from it.

Sale of business with buyback (put/call)

A tool for situations where the seller wants to leave the possibility of a return entry or the investor requires a guaranteed exit.

The choice of structure determines tax implications, regulatory risks and the complexity of execution. A mistake at this stage can cost tens of percent of the transaction price.

Step 6. Assessing sanctions and compliance risks

For transactions in Russia and the CIS, this is the central stage today.

It is necessary to check:

• Whether beneficiaries, companies or contractors are under sanctions;
• the structure of the ultimate owners for links with sanctioned persons;
• the presence of dual-use goods in the supply chain;
• export controls and sanctions clauses in contracts;
• Risks of secondary sanctions for the investor;
• currency regulation and blocking restrictions of the Central Bank.

A strategic investor, especially from friendly jurisdictions (UAE, China, India, Turkey), still requires an international compliance standard. If the company is not ready to provide it, the transaction can be stopped by the investor’s compliance officers at the final stage.

Step 7. To restore order in the employment relations

The investor will be interested in:

• whether employment relationships with key employees are formalized;
• Whether there are non-competition and confidentiality agreements
• Whether the intellectual property created by employees is protected;
• whether there are management options or incentive programs;
• Whether there are hidden labor disputes or collective risks
• how foreign personnel are registered (work permits, patents).

Human capital is one of the key factors of evaluation. The risk of a team leaving after a deal could destroy the investment hypothesis.

Step 8. Preparing an information package for the investor

A properly packaged business greatly speeds up the process.

The information package should include:

• Description of the business model and competitive advantages;
• audited reporting;
• ownership structure and beneficiaries;
• review of key assets and rights thereto;
• information on judicial and tax disputes;
• a list of regulatory risks and ways of their mitigation;
• Market data and growth forecast;
• draft transaction structure.

The package is prepared by lawyers in conjunction with financiers. Poorly prepared documents at the start reduce investor confidence and narrow the space for negotiations.

Step 9. Form a deal team

Attracting a strategic investor is a project involving several professional consultants.

The minimum command shall include:

• M&A and sanction compliance lawyers;
• tax advisers;
• auditors;
• an investment banker or M&A advisor;
• Professionals in business and asset valuation.

The absence of a qualified team on the part of the seller leads to asymmetry of information, which the investor will definitely use.

Step 10. Be prepared for negotiations and post-deal commitments

The transaction does not end with the signing of the contract. A strategic investor almost always requires:

• Warranties and representations (warranties and representations)
• Liabilities for loss (indemnities);
• retention of part of the purchase price (escrow, holdback);
• personal guarantee of the beneficiary for key risks;
• Restrictions on competition after sale (non-compete);
• Commitments on integration and transition.

The owner must understand these conditions in advance and put them into the negotiation strategy.

Strategic vs Financial Investor: pick

The choice depends not on abstract attractiveness, but on the owner’s goals, the size of the business, the industry and the company’s readiness for external control.

How to strengthen your position before the process begins

The best preparation for the transaction begins 12-24 months before the investor.

It is recommended in advance:

• conduct a legal audit and close the identified gaps;
• Clean the corporate structure of non-functioning elements;
• transfer assets to operating companies with a transparent history;
• settle tax and judicial disputes;
• implement compliance procedures (KYC, AML, export control);
• formalize corporate governance (board of directors, protocols);
• to issue IP rights;
• to enter into agreements with key employees;
• prepare audited reports;
• Independently evaluate the business and assets.

The business should be ready for the transaction not at the time when the investor has already expressed interest, but long before that.

Common mistakes in preparing for attracting an investor

1. Pull it down with the cleanup.

Owners often start structuring only after receiving a term sheet. That time is critically short.

1. Hide the risks

A strategic investor will find problems during due diligence. Concealment kills trust and deal.

1. Evaluate business based on unaudited data

An assessment that is not backed up by verified reporting will not be taken seriously.

1. Not to take into account sanctions risks

Even for transactions within Russia and the CIS, investors with international participation require compliance clearance.

1. Not to make agreements with partners

The absence of a corporate contract or inconsistency of the positions of co-owners can stop the transaction.

1. Negotiate without a professional team

Investors always come with their lawyers and financiers. Asymmetry of competence is a direct loss of money.

Owner's checklist

Before entering the strategic investor, you need to answer 15 questions:

1. Who is the ultimate beneficiary and is this information confirmed?
2. Is the corporate structure transparent and does it have unnecessary elements?
3. Are all key assets covered?
4. Is the business operationally independent of the owner?
5. Have you had any audited reports for the past three years?
6. Are there hidden or unfinished tax disputes?
7. Do the company’s operations comply with CFC and currency control rules?
8. Does the company have compliance or sanctions risks?
9. Are there any contracts or non-competition agreements with key employees?
10. Is the company’s intellectual property protected?
11. Is there a shareholder agreement governing the sale of shares?
12. What is the best deal structure for the seller’s purposes?
13. Is the information package ready for the investor?
14. Is a professional team of consultants formed?
15. What post-sales obligations is the owner willing to take on?

What a strong preparation strategy looks like

A strong strategy usually includes five levels:

1. Legal & Tax Housekeeping

Cleaning of the structure, registration of assets, tax compliance, closure of disputes.

2. Business Packaging

Preparation of reporting, business models, formalization of processes.

3. Risk Mitigation

Sanctions compliance, anti-corruption procedures, IP protection.

4. Deal Structuring

Selection of the optimal transaction model, tax architecture and settlement mechanism.

5. Negotiation & Execution

Team formation, position preparation, negotiation and closing of the deal.

Without the first level, the other four will not work.

FAQ

Is it possible to attract a strategic investor to a Russian company in the current conditions?

Yeah. Despite the sanctions restrictions, strategic investors from friendly jurisdictions as well as domestic players are showing a high interest in quality assets. The main thing is to ensure a transparent structure and compliance clearance.

More importantly: High price or clean deal?

For a strategic investor, clean business is the number one condition. The price is discussed only after the legal and tax purity of the asset is confirmed.

Can you build a company without external consultants?

You can start a preliminary audit with your own forces. However, full preparation for M&A requires the participation of lawyers, tax professionals and auditors. The risk of error without a professional team is too high.

What if there are sanctions elements in the structure?

It is necessary to conduct a detailed analysis, assess the risk of secondary sanctions for a potential investor and consider options for restructuring, isolating or replacing problematic elements.

How long does it take to prepare the company?

Depending on the state of the business – from 6 to 18 months. Quick preparation is possible, but is usually accompanied by tougher conditions on the part of the investor.

Does the registration of a company in the CIS affect the process?

Yeah. The jurisdiction of the operating company determines the applicable corporate law, tax regime, currency restrictions and the set of available transaction structures.

Can I sell a business if it is tied to one customer?

You can, but at a discount. The concentration of the client base is one of the key red flags for investors. Diversification of revenue increases the valuation of the business.

What are the assurances of circumstances and why does the investor require them?

This is a guarantee of the seller about the state of the business. If after the transaction it turns out that they were unreliable, the investor has the right to claim compensation for losses. This is the standard M&A practice.

Related services

• M&A, Corporate Law and Private Equity
• Sanctions, Export Controls and International Compliance
• Tax structuring and dispute resolution
• International Arbitration and Cross-Border Disputes
• Protection of Intellectual Property and Intangible Assets

Related material

• How to Conduct a Legal Audit of a Company Before a Transaction
• Sanctions risks in M&A transactions in Russia and CIS
• Selection of the transaction structure: direct sale or joint venture
• Corporate contract: How to protect shareholder rights when an investor enters
• How to evaluate a business to attract an investor
• Due Diligence: What a Strategic Investor Looks at
• How to structure options programs for key employees
• Currency Control and Cross-Border Transactions in the New Conditions
• How to check the foreign investor
• Asset Protection in Preparation for M&A

Conclusion

Preparing a company to attract a strategic investor requires not cosmetic improvement of reporting, but deep legal and tax cleaning of the business.

The seller’s strong position is based on a transparent structure, impeccable rights to assets, clear tax history and lack of compliance risks.

In M&A deals, the winner is not the one who offers the most beautiful investment story. The winner is the one who long before the negotiations understands what risks the investor will see, how they affect the value of the business and how to make sure that the real price of the transaction is equal to or close to the expectations of the owner.