You are ready to sell your business. You have determined that the market is ready, you are ready and your business is ready. You have reviewed your exit options and decided on selling your business. You have even taken the time to put together your “A Team” to maximize the value of your business and help you manage the process — identifying an accountant, an investment banker (if applicable) and maybe even an attorney. But now what?
Most business owners eagerly anticipate the eventual sale or transition of their business, but dread the legal process that it will to take to close the deal. We want to give you a basic understanding of the arc of a typical stock or asset sale transaction and associated time periods.
Step 1: Enter into a Confidentiality Agreement with Potential Buyer(s) (1-2 days): Prior to discussing any details with a potential buyer or buyers, you need to immediately request that any interested party execute a simple mutual confidentiality agreement. Protect yourself! This is a quick but vital step to make sure you protect the sensitive and proprietary information that is essential to your business (your clients, intellectual property, business process, etc.).
Step 2: Negotiate and Execute a Letter of Intent (1-2 weeks): Once you have an interested buyer or buyers, you will likely start receiving letters of intent for the purchase of your business. We often work with seller clients to review and comment on the letters of intent, as they are essential in forming the foundation for the transaction documents. Letters of intent will vary significantly in amount of detail, but almost always contain basic information with respect to: (i) the structure of the transaction (asset vs. stock sale), (ii) the proposed purchase price and structure of payment of such purchase price, (iii) an outline of the due diligence process (discussed below), (iv) proposed restrictive covenants (non-compete or non-solicit covenants that will restrict you after closing), (v) a list of other conditions or anticipated steps necessary to close the transaction, and (vi) whether the proposed transaction is exclusive (60-90 days?). We strongly encourage you to avoid signing a letter of intent with a buyer prior to our review. While letters of intent are non-binding in most respects, they do form the roadmap of the transaction that potential buyers are usually unwilling to depart from.
Step 3: Due Diligence (Weeks-2 Months): During this period, your final interested buyer or buyers will request certain information about your business. They will want access to a limited virtual diligence room which will usually contain all material corporate organizational documents, financial information, all material contracts, regulatory permits and licenses, insurance and employee benefits materials related to your business. It is never too early to start putting together these documents! Typically, the potential buyer(s) will send a thorough due diligence request list asking for all of these documents. We will assist you in pairing down this request list into something manageable and responding to the buyer(s)’ requests. Responding to this due diligence request list and the inevitable multiple follow-up requests for additional information can be your most time-consuming portion of the transaction.
Step 4: Drafting and Negotiating the Fundamental Transaction Documents (Weeks–3 months): Preparing and negotiating the transaction documents is the phase of the transaction over which you will have the least amount of control. The length and intensity of this process will widely vary depending on the complexity of the transaction, the number of issues that come up in the due diligence process and that need to be resolved in the negotiation phase, and, most importantly, the reasonableness of the buyer and buyer’s counsel. Customarily, buyers will handle the first draft of the asset or stock transaction documents. We will then thoroughly review those documents and then work with you to negotiate the material terms of such documents (the structure of the purchase price, earn-outs, representations and warranties, and right and obligations).
Step 5: Closing the Transaction: You are finally there! It is now time to sign and close the deal for your business. Often, stock and asset deals are a “sign and close” transactions, which means that while the buyer is doing their “due diligence” through Step 4, we are negotiating the transaction documents referenced in Step 5. Because all of this occurs simultaneously, you often can sign the transaction documents on the date of closing the acquisition, and, more importantly, you are paid your purchase price.
While there are infinite variations in this process, some form of this arc is what you can expect when you go to sell your business. We promise that there will be unexpected obstacles and issues, but the more you understand the process and know what to expect, the better shape you will be to ultimately close the sale of your business.
If you would like to learn more about the structure of a typical sale transaction or are looking for legal assistance in selling your business, please feel free to contact us!