The sale of a business is typically the single-most significant event in an owner’s business life. As most owners have never sold a business, any apprehension is understandable. If you are contemplating or preparing for the sale of your company, or M&A, we believe it’s critical to understand the typical components of a deal so that you will be ready to embark upon this journey.
In this blog series, 10 Major Steps in Selling a Business, we examine the important elements common across most sales in collection agency M&A through a case study of a previous transaction our firm completed. We will call the selling company “Company, Inc.” to preserve confidentiality. The fourth part of the series describes the final stretch of the sale process, after exclusivity has been established. Parts one (Preparing to Sell), two (Engaging Buyers), and three (Moving Forward with Buyers), are linked.
Engage in Due Diligence
Once a letter of intent (LOI) is executed with one buyer, the process of confirmatory due diligence begins. In this process, the buyer scrutinizes all the aspects of the company with the goal of confirming what has already been presented. They will want to review client and vendor contracts, licensing, systems, staff, benefits, and visit the office(s). They will also want to meet with company accountants to review financial statements. They may require a financial audit. A buyer could assemble a small army of accountants, lawyers, and operational due diligence to turn over every stone. This phase is critical in the sale of a business and being well prepared ahead of time can help smooth the process considerably.
The signing of the LOI will stipulate that the deal must close within a specified timeframe, during which due diligence typically occurs on an exclusive basis. If the deal doesn’t close within that timeframe, the LOI expires, and, unless both parties agree to an extension, everyone can go back to their business of either talking to other buyers or searching for other sellers.
We recommend that sellers do a fair bit of due diligence of their own, prior to signing the LOI if possible, to make sure they know the buyer and understand their intentions after the sale. As Company, Inc. had multiple offices, site visits needed to be carefully coordinated. While those visits were taking place, the buyer’s financial team worked with the company’s accountant to review the financial performance and understand all the details.
Negotiate the Definitive Purchase Agreement and Other Agreements
While due diligence occurs, the transaction attorneys for both buyer and seller will draft and negotiate a definitive purchase agreement. The word “definitive” is used because it is the governing document over the proposed transaction, and if an item is not stipulated in that agreement, it’s simply not part of the deal. In addition, other agreements that are often included in a sale and negotiated at this time include employment agreements and noncompetition/non-solicitation agreements.
Close the Deal
Closing occurs after:
- Due diligence is completed and approved;
- Financing is secured; and
- All agreements are executed.
With an organized approach, a well-facilitated process, and a little luck, the definitive purchase agreement is signed and the deal is closed. If cash (at closing) is part of the deal structure, it is typically wired to the seller’s bank account at that time. As a final part of any collection agency M&A deal, everyone shakes hands and moves on to the next phase in their lives.
The selling process often lasts four to six months, sometimes shorter, sometimes longer, depending on either side’s focus on the transaction. Fortunately, Kaulkin Ginsberg can help you navigate those choppy waters. We have worked with small, mid-sized, and large privately-owned companies, Fortune 500 corporations, and financial investment firms on their collection agency M&A strategies for thirty years. Whether you’re seeking professional sell-side representation, assistance forming a partnership or joint venture, a transaction assessment, or a valuation, Kaulkin Ginsberg will guide you through the process. For more information, or to schedule a confidential discussion of your business goals, contact us at email@example.com.