Below is a simplified overview of the basic process most sales of small to mid-sized businesses go through, with the caveat that each business and transaction is unique and may deviate from the below.
1. Pre-Deal Analysis. The sale of a house serves as a good analogy for the sale of a business. When selling a home, most owners will look around at their well lived-in home, frequently with the aid of a sales agent, and identify various measures they can take to make their home more appealing to a prospective buyer. The same concept applies to a business sale. This process can be referred to as “proactive due diligence,” and while it’s not a necessity and is commonly overlooked or simply skipped, I believe it’s well worth the effort. The process involves taking a careful look at your business, much like a prospective buyer will, for issues that might make your business more (or less) attractive, or could even derail a deal if not addressed. While you are likely the most qualified to review the physical facility of your business, it usually takes outside assistance to review the financial and business aspects — such as reviewing key contracts and financing arrangements for potential issues, reviewing historic corporate records to make sure they’re current, and analyzing financials for any necessary adjustments.
2. Offer / LOI. After the signing of a confidentiality agreement (also referred to as a nondisclosure agreement — same document, just different names) and disclosure of some limited information, most acquisitions are led off with an interested prospective buyer making a non-binding offer in the form of a Letter of Intent (or “LOI”), sometimes referred to as a non-binding Term Sheet or Memorandum of Understanding (“MOU”). An LOI will serve as the roadmap of the transaction, addressing the most material terms of a proposed deal and serving as a guide for the attorneys in drafting the purchase agreement. At a minimum, an LOI should address: confidentiality; structure of the deal (asset sale, stock sale, or merger); purchase price; payment terms; due diligence timing and grounds for termination; and terms relating to post-closing (employment agreements, non-competes, etc.).
A huge benefit of a negotiated, thorough LOI is early agreement on major deal points before spending the time and expense of having counsel prepare a purchase agreement. I strongly encourage you to loop in your business attorney at the early stage of negotiating the LOI, if not already engaged by that point. Additionally, it’s considered “bad form” for an attorney to renegotiate deal terms stipulated in an LOI, and most attorneys are reluctant to do so absent some glaring concern.
3. Purchase Agreement. Once an LOI is signed, the parties will begin negotiating the definitive purchase agreement — typically either an “asset purchase agreement” or a “stock purchase agreement.” I’d estimate 95% of the time for typical, privately-held businesses, it’ll be an asset purchase agreement. It is customary that the buyer’s attorney will prepare the initial draft within a relatively short period after the LOI is signed. Depending on the complexity of the deal, this can take anywhere from a week to a couple months to negotiate and finalize.
4. Due Diligence. “Due diligence” refers to the parties’ respective investigations of each other, with the emphasis on the buyer’s investigation of the seller’s business. Depending on the nature of the business and a buyer’s preexisting familiarity, this can range from providing some recent financials to an extensive review of financial records, physical facilities, corporate records, key contracts, intellectual property rights, and more. Even with a confidentiality agreement in place, I still recommend sellers remain as guarded as possible with proprietary information that could be detrimental if the deal falls through — such as the identity of key customers or suppliers, or any trade secrets.
5. Closing. Once the buyer has completed its due diligence, their financing is in place, and all ancillary agreements are completed (employment or consulting agreements, various assignments, maybe a lease, etc.), the parties will close on the deal. Historically this took place in the offices of the seller’s attorney, but anymore the documents are usually simply signed and exchanged electronically and there’s no in-person closing. (Alas, I miss them.)
As mentioned above, not every deal will follow the above process exactly, but hopefully this article will provide some sense of the basic process, as well as some key terms used, if you sell your business in a third-party sale.
Ander Smith is an accomplished attorney with a practice dedicated to assisting clients on a wide range of business transactions. Prior to his current solo practice, Ander worked both in-house and at national law firms. You can contact him at [email protected].
Information contained in this article is not intended to and does not constitute legal advice, recommendation, or counseling under any circumstance. This article does not create an attorney-client relationship. Pursuant to applicable rules of professional conduct, portions of this publication may constitute Attorney Advertising.