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.
The process of selling a business is pretty straightforward, though the sale of each business will have its unique aspects. The typical business sale process goes like this:
1. Initial Discussions between the seller and one or more proposed buyers. Before starting the initial discussions, you want to have the potential buyer sign a confidentiality agreement, sometimes called a non-disclosure agreement.
Get your M&A lawyer (remember we talked last time about how it takes a team) to prepare one for you. The proposed buyer may insist on using their form of confidentiality agreement, and you’ll need your M&A lawyer to review it.
If the initial discussions are positive, they will probably lead to a
2. Term Sheet or Letter of Intent, that will lay out the basic terms and conditions of the deal. Some common points covered by the Term Sheet include:
– Whether the transaction will be a sale of stock or a sale of assets;
– 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; and
– Many other possible points.
Be sure to involve your team in this process. Too often I’ve been presented with a signed, binding Term Sheet for a sale of a business, and discovered issues that were (either intentionally or unintentionally) significantly adverse to the seller. If the attorney and other team members can get involved at the stage of preparing the Term Sheet, the transaction is likely to go much more smoothly.
When you have a signed Term Sheet, it is time to begin the
3. Due Diligence Period. This is when the buyer and seller will exchange requested corporate, financial and other information about the seller (referred to as “due diligence”), collect and analyze this due diligence information, and assess risks and issues raised in the process. Your M&A lawyer, accountant, and other team members will generally handle this process, and review the results with you.
This is the time where a buyer seeks to find all the problems and pitfalls of the business they want to buy. The seller should be cooperative, open and honest with information. Proper disclosure builds trust between the parties and makes the transaction go more smoothly. It also goes a long way to preventing post-closing lawsuits by a disgruntled buyer.
The due diligence process will likely unearth issues that require clarification and proposed resolution. During and immediately after the due diligence period, buyer and seller will conduct
4. Negotiations. Depending on the complexity of the transaction and other factors, there may be several rounds of negotiations between the term sheet and the purchase agreement. You will want to get input from your team regarding each point of negotiation.
Successful negotiations will lead to a
5. Purchase Agreement. A draft purchase agreement may be circulated during or after the Due Diligence Period. When all terms and details are agreed, the purchase agreement is completed and signed. In small acquisitions, the signing of the purchase agreement and the closing of the deal may be simultaneous. In more complicated acquisitions, the purchase agreement often provides for signing on one date, creating a binding agreement that is subject to closing at a future date, when a list of agreed conditions, including obtaining financing, is satisfied. There will likely be
6. Ancillary Agreements. These may include loan documents, licenses, employment agreements for key employees or a founder who stays on, and others as required by the transaction.
Your M&A lawyer and accountant will do the bulk of the work in drafting the Purchase Agreement and Ancillary Agreements. You may need to bring in other team members and specialists. It is critical to get these documents right.
No matter how careful you are, a few things may turn up or slip through the cracks. These lead to
7. Pre-Closing Discussions that usually occur after signing the Purchase Agreement, but before closing. This stage is typically when problems involving last-minute discoveries, closing conditions and financing are discussed and resolved. This is also the time the Transition Plan can be prepared (see Step 8), and a good time to announce the deal to your employees and other stakeholders (see Step 6).
8. Closing. Once all the closing conditions are met, the transaction closes, and money and ownership of the business changes hands from buyer to seller.
9. Post-Closing. There may be post-closing obligations, such as completing transfers of assets, managing post-closing obligations under service agreements, collecting receivables, determining and paying amounts due under an earn-out provision, etc.
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.
This process is also heavily document-driven, as the goal is to close a signed purchase agreement and related contracts that cover all the terms and contingencies. Your attorney will typically coordinate the process, working with your management and other professional team members to document and close the transaction. Be patient. 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.