How to Buy or Sell a Business, in 5 Phases
As an attorney who has conducted several dozen business purchase and sale transactions, it has been my experience that the likelihood of a successful completion of the transaction increases considerably after the conclusion of each step of the transaction. Each of those phases of the transaction are described here so you can understand what to expect during the business acquisition or divestiture process, and understand the status of where your transaction stands. Here are the five major phases of a business purchase and sale transaction:
1) Letter of Intent, Confidentiality & CNDAs
After the identification of a target business to purchase or an interested
potential buyer, the Letter of Intent, or “LOI,” sets out the most broad, intended terms of the transaction. Usually these terms of the LOI are:
Determine Asset Sale vs. Interest Sale
What to do with the Seller's Contracts
Determine the Sales Price & any Pricing Formula
Exclusions from the Sale
What to do with Employees
Confidentiality and Non-Disclosure Agreements ("CNDAs")
For a description of each of the above-components to an LOI, read the post, What is an M&A Letter of Intent? here
If the initial terms are agreeable to the parties, the LOI is signed by authorized representatives.
2) Due Diligence Phase
After the agreement of the intended major terms of the transaction, through an LOI/CNDA, and before entering a Purchase & Sale Agreement, the Seller will work with the Buyer in providing and facilitating with information gathering. The information gathered by the buyer is essential in order to make a determination whether or not to go forward with the next phase of the transaction.
The Due Diligence inspections include review of the selling company’s financial documents, such as the balance sheet, revenue reports, loan documents, leases, copies of ongoing performance contracts, employment agreements, and verification of authority to enter into a binding contract to complete the intended transaction. This stage is a great time to get a business valuation from an experienced business broker or accountant.
If the information provided to and uncovered by the Seller is satisfactory in order to make a final offer as to the major terms of the buy/sell transaction, the parties will then enter into a Purchase & Sale Agreement.
3) Purchase & Sale Agreement
A well-drafted Purchase & Sale Agreement document (the “PSA”) will provide proper protections for all parties, the necessary flexibility to allow the deal to close or be terminated if appropriate, but rigidity to help ensure the transaction will close as the parties originally intend.
Typical essential components of the PSA will include:
Proper identification of what is to be transferred;
The purchase price and how it is to be allocated;
Formulas for determining certain costs and prices for inventories;
Assigned and assumed contracts, benefits & liabilities;
Representations and warranties;
Contingencies to completing the transaction;
Terms of the due diligence inspections;
What will become of the deposit;
Details regarding the intended closing including deliveries to be made;
How the intended transaction may be terminated and any rights and obligations due to termination; and
Pre- and post-closing obligations.
Once the PSA is properly executed by all parties, the next phase will be to enter into the Final Due Diligence period, and for the parties and their representatives to work to ensure contingencies to Closing are satisfied, to the extent they are in the control of the parties.
4) Final Inspections
The Final Inspections should always include:
Provision, and review, of financials as reporting periods that come due since initial reports were provided;
The provision, and review, of representations and warranties as they change;
Title, lien and judgment searches to determine if any actions can and should be taken to remove encumbrances on the Seller and the Seller’s assets; and
Physical inspection of the assets, inventories, real property, land and personal property.
Additionally, during this time and after, efforts should be taken in order to help ensure all contingencies are met in order to satisfy conditions to Closing, most especially, necessary third-party approvals (like those necessary to the assignment and assumption of necessary contracts, obligations and benefits); and obtaining any financing necessary to fund the deal.
5) The Closing
Prior to scheduling the Closing, all contingencies that can be satisfied prior to Closing should be satisfied, or there should be a strong reasonable belief that such conditions will be satisfied. Certain contingencies are not expected to be met until immediately prior to or during the Closing process, such as a final check for relevant encumbrances and of course, payment of the purchasae price.
At the Closing, the following documents should have been prepared, and the form of which agreed upon by the parties, and these documents will need to be executed and tendered to the proper party, or parties, to the transaction:
A Bill of Sale;
An Assignment & Assumption Agreement;
Certified Copies of Resolutions showing approval of the transaction;
A Power of Attorney to allow for any post-closing actions to transfer titles or to assign & assume contracts;
The Closing Statement; and
Proof of Funding.
As you can see, there are many, many components to buying or selling a business. A proactive lawyer experienced in such transactions can be the difference between getting a deal done and spinning wheels (along with money). Always make sure you understand which phases your transaction is in, and who is responsible for taking the next steps in order to move closer to closing.
Joshua Logan of Achieve Legal is a Florida-licensed Franchise and M&A Attorney, serving clients throughout Florida from Orlando, and nationwide through association with local counsel. You can call him at (407) 502-2580, or he can be reached by e-mail at JLogan@AchieveLegal.com