The process of selling a company involves a coordinated sequence of well-defined activities for the buyer and seller. Although the process is simple in concept, and ultimately results in a transaction that is beneficial to the seller and buyer, it requires an abundance of diligence and patience.
Preliminary due diligence. To initiate the process, the seller provides historical financial information, a detailed business description, and company industry outlook narrative to a potential buyer, who is bound by a confidentiality agreement (CA). The prospective buyer will interview seller and conduct independent industry research to gather additional information to assess whether the company fits its criteria.
Offer. Buyer will submit a letter of intent (LOI) to seller, including the offer price, a proposed financing structure, key terms and conditions, and an estimated closing date. This step initiates the first stage of negotiations. The LOI is typically signed by both buyer and seller, granting buyer exclusivity to pursue the acquisition without competition for an agreed upon period of time.
Confirmatory due diligence. If the seller accepts the LOI, the buyer will initiate a more invasive due diligence process, diving deeply into the business’ financials, assessing potential tax liabilities, and reviewing legal documents. A careful buyer will make many additional data requests of the seller at this stage, which are necessary for the buyer to have confidence in the value of the business and to move forward with the purchase agreement.
Purchase agreement. Based on what is uncovered during due diligence, the buyer will draft a purchase agreement that will contain the (potentially revised) offer price, type of purchase (asset vs. stock), financing structure (up-front cash, seller financing), terms and conditions, representations and warranties. The purchase agreement will also contain other related agreements, including seller’s non-competition, non-solicitation and transition agreements; key employee employment agreements; and mutual confidentiality agreements.
Closing. In conjunction with reaching agreement on terms of the purchase agreement, the seller and buyer will also agree on the anticipated closing date of the transaction. In some instances, the closing of the transaction can occur simultaneously with the signing of the purchase agreement and other related agreements. However, often times, especially in the case of an asset sale, there needs to be a period of time between the signing of the purchase agreement and the closing of the transaction to allow for certain activities to take place, which may include the seller’s obtaining consents or approvals from certain parties (e.g., key customers or suppliers, regulatory or governmental bodies, etc.) to complete the sale. The seller may also be required to assign key contracts to the buyer in an asset sale, and these assignments will typically occur between the signing of the purchase agreement and the closing of the transaction.
Transition. As a condition of sale, the seller may be retained by the buyer for a transition period of up to 6 months, and available as a consultant on an as-needed basis for up to a year after the closing date.