Knowing what to expect when going into the sale process and teaming up with experienced advisors is critical to making the sale of your business the crowning achievement of all of your hard work. Below learn several steps in certain business sales, using a hypothetical company named ABC Manufacturing, and provides tips for success at each stage. This article generally assumes an asset sale transaction for a privately held business; steps might change in a stock or merger transaction. Talk to your tax professionals about the best approach for you.
1. Non-disclosure agreement
Before conversations with the prospective buyer get detailed, and before ABC provides any sensitive or proprietary information (e.g., financial statements, tax filings, customers list, business plans, etc.), they need to enter into a confidentiality or non-disclosure agreement (NDA) with the prospective buyer. The NDA should provide some protection to the information ABC shares with the buyer from improper use or disclosure, and it can also cover information that the buyer shares with ABC.
The NDA might additionally cover the non-poaching of employees or customers and suppliers. NDAs signed in this context will usually provide confidentiality and non-use protections for a period of two to five years, except that trade secrets are covered for so long as they are trade secrets.
2. Valuation/initial diligence
ABC needs to have a sense of their business’s value, with documentation to support that valuation. If they are unsure about the value of their business, ABC might want to hire a financial advisor with experience in business valuations. The buyer might also request corporate records, ownership information, copies of key contracts, employee information, prior tax filings, and asset information to learn more about ABC’s business.
3. Letter of intent
In some sale transactions, ABC might want to negotiate a letter of intent (LOI) with the buyer that details the parties’ understanding of the purchase price and other key terms. If ABC is going to use seller financing, a holdback of the purchase price, or earn-out payments, the LOI is where these terms are documented. There should not be any drastic changes in the sale’s economic terms after the LOI stage. While most of the LOI is non-binding, it still serves as a guidepost for future negotiations in the deal.
4. Comprehensive due diligence
ABC might have thought all the diligence and document requests were just about over after the negotiations on pricing, but unfortunately, they are not. After the LOI is signed, ABC’s legal team and other professionals will start to ramp up their work on the deal and will likely have extensive and detailed requests for information. In addition, the buyer’s acquisition team will ask for copies of ABC’s permits/licenses, details about any past or current litigation or environmental events, assets lists, customer/supplier information, insurance information, and details of related-party transactions, just to name a few.
This tedious process is necessary so that the buyer can be in a position to take over ABC Manufacturing upon the closing. The buyer needs to know ABC’s business just as well as ABC does in order to be successful.
5. Purchase agreement
The purchase agreement details all the components of the business sale. The initial draft is usually prepared by the buyer’s counsel during the due diligence process and will get exchanged between the parties and modified various times prior to signing. The purchase agreement is often set up with a delayed closing mechanism where the parties sign the agreement and commit themselves to closing the sale transaction, subject to the satisfaction of various conditions set forth in the purchase agreement.
Other key provisions in the purchase agreement include representations and warranties about ABC’s business, certain covenants related to the operation of the business between signing and closing, tax matters, indemnification, and restrictive and post-closing covenants (such as non-competition and non-solicitation obligations placed on ABC’s parties). ABC’s legal counsel is integral to navigating the purchase agreement and will negotiate the purchase agreement provisions with a primary goal of reducing post-closing liability.
6. Deliverables/business transition
After the purchase agreement is signed, both parties will be focusing on getting to the closing. They will have laid out various conditions that must be satisfied and deliverables that must be provided prior to closing. One of the bigger efforts during this time involves obtaining third-party consents to the sale, including the consent of ABC’s landlord. ABC might not realize it, but many of their contracts and licenses might contain provisions that prevent them from selling their business without the consent of the counter party. ABC will need to reach out to these parties and obtain their consent.
ABC will also likely need to coordinate the payoff of any indebtedness, removal of liens, termination of employee benefit plans, and transition of their employees to the buyer. They might also be negotiating certain ancillary agreements during this time that were only referenced in the purchase agreement, such as escrow agreements, employment agreements, promissory notes, and others.
7. Closing
At this point, ABC has obtained all third-party consents and provided all other required deliverables. Their counsel will prepare a signature page packet for all the items that need to be signed as part of the closing. They might also prepare a funds flow memo to document all the payments that will be occurring at closing so that ABC ends up with a closing statement of sorts and so that everyone understands how the money will move on the closing day.
There is usually a short closing call on the morning of closing where ABC Manufacturing and the buyer confirm receipt of all closing deliverables, release their signature pages to each other, and start to wire funds. Time for ABC to pop the champagne and celebrate the successful sale of their business.
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This article is a brief summary of the sale process and does not constitute legal advice. Please work with your professionals to ensure that you keep as much of the value of your business as you can while limiting your risk and reach out to an attorney for legal advice specific to your situation.
Blake Bowman works with clients to help companies large and small achieve their unique goals. His experience in mergers and acquisitions, commercial financing, securities offerings, and corporate governance allows him to provide practical advice and find sophisticated solutions to complex issues.
Article from: bizjournals.com