In Part 1, we considered some factors that go into deciding to sell your business. We mentioned the need for a good M&A team to help.
In this part, we’ll talk about the process of the sale. This will help you get organized and plan your sale. Even if you’ve decided not to sell your business now, it’s worthwhile to understand the process, so you can be ready for a future sale.
Step 2. Understand the Process.
Though each sale of a business has unique components, the process follows a similar trajectory. The typical business sale process goes like this:
- Initial Discussions between the seller and one or more proposed buyers. The first step is communication. The seller needs to engage with potential buyers, but before doing so the seller should also protect themselves by having any potential buyer sign a confidentiality or non-disclosure agreement. When you are preparing to sell your business, an important preparatory step is to have your M&A lawyer draft such an agreement for potential buyers. In turn, potential buyers may push back or propose their own confidentiality agreement; either way you’ll want your M&A lawyer to review what the buyer proposes.
Once the buyer has engaged with a seller demonstrating genuine interest, and the initial discussions have gone well, the next logical step is a…
2. Term Sheet or Letter of Intent, that will lay out the basic terms and conditions of the deal. The term sheet should cover some key components including:
- Whether the transaction will be a sale of stock or a sale of assets (for more on the difference between these two, read this recent article)
- The proposed purchase price
- Possible price modifiers
- Form of payment, i.e. all cash, cash plus promissory note or other form
- Tax aspects of the sale
- Potential retention of key personnel
- If the owner is requested or required to stay on for a period of time
- Regulatory issues
- Issues arising from the seller’s financial statements
- If there is a PPP loan or a SBA EIDL loan, how this will be paid
- Whether the term sheet is binding or non-binding
Your legal team should be involved in the process of drafting and reviewing this document to avoid adverse effects to you, as the seller. It is your business, and you want to sell it on your terms. A lack of attention to detail in this step can lead to issues, such as a binding term sheet that is signed despite oversights, whether unintentional or intentional, that can negatively impact the seller. Having your team oversee this process increases the likelihood of a smoother transaction.
Once the term sheet has been reviewed and signed, the next step is called the…
3. Due Diligence Period. Throughout the due diligence period, the buyer and seller will exchange requested corporate, financial, and other information about the seller (referred to as “due diligence”), they will collect and analyze this due diligence information, and assess risks and issues raised in the process. You should rely on your team, including your M&A lawyer, accountant, and others, to guide you through this process and review the results.
A potential buyer uses the due diligence period as the opportunity to discover any problems or shortcomings of the business they’re interested in purchasing. The seller, in turn, should be transparent and cooperative in representing their business to the buyer, including information that may be damaging. Proper disclosure builds trust between the parties and makes the transaction go more smoothly. This also helps mitigate the possibility of a buyer filing suit later over something that may have been misrepresented or misunderstood during due diligence.
The due diligence process is likely to unearth issues that require clarification and/or proposed resolution. Throughout and immediately following the due diligence process, the parties will enter the next step of the transaction.
4. Negotiations. The sale of a business can vary in level of complexity, and this may mean that several rounds of negotiations are required to bridge the gap from the initial term sheet to a final purchase agreement. In other instances, negotiations may be simplified by clarifying the information provided through due diligence. Regardless, you will want your team involved in every step of negotiation.
Successful negotiations will lead to a…
5. Purchase Agreement. Usually, your team will be preparing a draft purchase agreement during the previous steps, and this draft may be circulated during or after the due diligence period. The draft purchase agreement is finalized when all terms and details are agreed upon and it is signed by all the parties. For purchases of smaller businesses, the signing of the purchase agreement and the closing of the deal may be simultaneous. For larger or more complex purchases, the purchase agreement often provides for signing on one date and creating a binding agreement that is subject to closing at a future date. This is often paired with a list of agreed conditions, including obtaining financing, that need to be satisfied. Once the purchase agreement has been drafted, reviewed, finalized, and signed by both parties, there may also be…
6. Ancillary Agreements.
Although the purchase agreement encapsulates the main terms in buying and selling a business, ancillary agreements may also impact the transaction. These may include loan documents, licenses, contracts, employment agreements for key employees or a founder who stays on, and others as required by the transaction.
You should rely on your M&A lawyer and accountant to lead you through this process and to draft the Purchase Agreement and Ancillary Agreements. Additionally, other team members and/or specialists may be needed to provide further insights. The tighter these documents are the better off you are in avoiding future complications.
Regardless of how careful you are throughout this process certain details may persist leading to…
7. Pre-Closing Discussions. These usually occur after signing the Purchase Agreement, but before closing. At this stage, problems regarding last-minute discoveries, closing conditions, and financing are typically discussed and resolved. This stage also provides an opportunity to prepare a transition plan ahead of the final closing and exchange of the business and to announce the deal to your employees and other stakeholders. Once Pre-Closing Discussions have settled any remaining hang-ups the buyer may have had, the transaction will culminate in a…
8. Closing. Before the transaction reaches a closing, all conditions must be met, and the buyer must be satisfied with the results of the process leading to this point. Then, the transaction closes and there is an exchange of money from the buyer for ownership of the business from the seller. This may not be the final step, because there may also steps required in…
9. Post-Closing. Certain post-closing obligations may include completing transfers of assets, managing post-closing obligations under service agreements, collecting receivables, determining and paying amounts due under an earn-out provision, etc. Your team should support you in understanding the potential post-closing obligations you may be subject to following the sale of your business.
Commitment of Time for Company Officers.
The sale of a business will require a lot of time and attention of several the management team. The company should plan that the Chief Financial Officer will spend nearly full-time on the project during the duration. The process also requires the President and other officers to be involved on short notice. The company should make provisions for this drain on personnel.
The sale of a business is a complex process requiring a true team effort. This process is heavily document-driven, as the goal is to close a signed purchase agreement and related contracts that cover all the terms and contingencies. As such, your lawyer should coordinate the process, lead you comprehensively through each step, and work with and communicate with your management and professional team to document the process and ultimately close the transaction. Be patient and trust the process. Take your lead from your M&A attorney and professional team.
In the next part, we will discuss some work you can do to “clean up” and make your company more presentable to a potential buyer, to prepare for the critical due diligence examination process.