For many business owners, the culmination of a lifetime of building a successful business is its sale. For many aspiring business owners, the first step is to acquire an already successful business, with plans to continue to grow and expand it as time goes on. The sale and acquisition process can seem both exciting and daunting for buyers and sellers. Whether that process is in your immediate future, or years down the road, having a general understanding of the process in advance can help buyers and sellers prepare. This article briefly describes the steps typically involved in buying or selling a business, for both buyers and sellers.
Preparing for the Sale
For sellers, the process begins well before a buyer is found and the terms are negotiated. As a Seller, the time you want a buyer looking at your business is when it is strong and growing, your management team is excited and motivated, and your customer base is expanding. This holds true regardless of whether your business builds widgets, sells or services products produced by others, or provides professional services. Buyers want to purchase growing businesses, and growing businesses command a higher price. Thus, it makes sense for sellers to look ahead and consider when it will be a good time to sell. Sellers should plan for their exit in advance by meeting with legal and financial advisors to develop a strategy and time frame for a sale. Timing is a critical component in achieving the best deal as a seller. If you wait to sell until you are burnt out and running out of steam and the business results show it, you have waited too long and the sales price will suffer. The team of professionals needed to prepare for and work through a sale includes your CPA, an attorney experienced in selling businesses, and possibly a broker.
Similarly, buyers should prepare for a purchase by selecting their team of advisors to help identify the right time to make an acquisition and to help identify the right opportunities. A buyer’s team will generally consist of an attorney, an accountant, and lender, among others. Often you can speed up the process by having established a banking relationship and making sure that your banker is on board with your plans to buy with the bank’s help.
Letter of Intent
Once the business is ready for sale and a prospective buyer is found, the next step is to negotiate the terms of a Letter of Intent (“LOI”). The purpose of the LOI is not to create a binding agreement between the parties or negotiate all of the terms of the sale, but to set the framework for the deal so that the parties can ensure they are on the same page as the process moves forward. Usually, the buyer’s counsel prepares the LOI and submits it to the seller for review and approval. If it is not acceptable, then the seller’s counsel modifies the LOI for submission to the buyer.
The most important rule to remember for the LOI is that it should be non-binding for most terms. The purchase price, time of closing, included assets, and other substantive terms may be negotiated further after the buyer has completed his or her due diligence. The binding terms should generally be limited to those regarding exclusivity in negotiations and confidentiality. The buyer will usually require that the seller commit to exclusivity, in that the seller will not negotiate with any other prospective purchasers once the LOI is signed and until the deal either closes or is abandoned. Both parties will also agree that they will not disclose any confidential information which they obtain to any other person or entity, and that they will not use any such information for any purpose other than to evaluate the proposed transaction.
Buyer’s Due Diligence
Once the LOI is signed, the buyer has a limited period of time to conduct his or her due diligence. The exact amount of time will be agreed to and set forth in the LOI. Due diligence is a thorough and detailed investigation of the financial, legal and operational records of a business. During due diligence, the buyer will have access to most of the information critical to successful operation of the seller’s business. Due diligence typically begins with the “Due Diligence Request” or a “Due Diligence Checklist” prepared by the buyer’s lawyer. A buyer should be working with his or her lawyer and accountant in reviewing the information, which will include information relating to: corporate records, financial and tax records, corporate indebtedness, employment and labor matters, real property, personal property, contracts and agreements, supplier and customer information, legal compliance and pending or threatened litigation.
Once the LOI is signed, and the due diligence is completed, the buyer and seller will negotiate any remaining terms. The buyer’s team and the seller’s team will then work together to draft and complete all the necessary sale agreements. The number and complexity of the agreements depends on the structure of the transaction. The documents you may see during this part of the process include: Consent Resolution (approving sale), Asset Sale Agreement, Non-Competition Agreement, Sale of Personal Goodwill, Bill of Sale, Security Agreement, UCC Financing Statements, Assignments of Contracts, Consent to Assignments and Lease Agreements.
These documents evidence the final written expression of the transaction, and will bind the parties once signed. While the buyer’s lawyer and the seller’s lawyer will be primarily responsible for drafting these documents, it is important to include the parties’ other advisers in the review and negotiation process.
Once the sale agreements have been finalized, the buyer and seller will then close the transaction on a specific date agreed to in advance. It is usually best if an escrow agent is identified early on in order to facilitate a smooth closing for everyone. The escrow agent is a neutral party who will arrange for all of the sale documents to be signed, and calculate and coordinate for payment of any pro-rated expenses due under the agreements. The escrow agent will work with both the buyer and seller to obtain any additional information needed to finalize the details of the transaction, and will work with the lender to arrange payment of the purchase price. Interestingly, many times transactions are closed through the use of email and fax, with the parties never meeting face to face with the escrow agent to sign the documents.
Of course the foregoing description attempts to simplify what most often is a complex and lengthy process. Sales can close within a matter of a few weeks, but more typically take several months from the inception of the negotiations until the transaction closes. Most clients will buy or sell a business only once or twice during a lifetime. That is why having advisors who regularly assist clients with this type of transaction is important. Lawyers in the Business and Taxation practice group at Saalfeld Griggs handle many business sale transactions each year. A significant component of our work is handling business sales and purchases. We help clients avoid many pitfalls that can occur during a business sale or purchase transaction and that otherwise catch the unwary by surprise. If you would like assistance in buying or selling a business, or planning a purchase or sale, feel free to contact our Business & Taxation Law Group.