You own a business. You’ve built it from the ground up, and put decades of hard work in to making it the successful company it is today. Now, you’re ready to retire and want to sell the business. Do you know where to start? After all, the sale of a business is typically the single-most significant event in an owner’s business life. Each transaction is different and comes with its own special circumstances, but the essence remains the same. Here are the 10 major steps in the process of selling a business if you hire a mergers and acquisitions (M&A) advisor (a.k.a. a broker).
Prepare the information memorandum
This is the initial step in the process. The memorandum describes the selling company so the buyer candidates can gain an understanding of the opportunity presented. This typically includes details about the company’s history, clients, markets, services, management and staff, systems, and financial performance. It’s important to note heavy client concentration, true cash flow, and all other key elements of your business. This will not be sent to anyone until a confidentiality agreement is signed.
Approach potential buyers
Determining the correct buyers to approach is critical in a successful sale. Depending on the size of the company, your broker might approach large industry buyers, high net-worth individuals, financial-type buyers, or even buyers from related industries known as strategic buyers. Next, your broker will have to determine how to approach the buyers. Will they approach just one? A limited pool of buyers? Cast the net out as wide as possible to ensure maximum exposure? Don’t forget about unsolicited offers.
Once you’ve determined who to approach, your broker will have to decide how you’ll approach them. The actual approach can be done via telephone, email, mail, or fax. But keep in mind, you should not disclose your company name, and ensure that you are contacting the decision-makers only. It is essential to reach the person who has the authority to conduct the transaction and no one else.
Execute a confidentiality agreement
An extremely important aspect to any deal is keeping it quiet until the appropriate time. If word gets out prematurely, it could be detrimental to sale of the business. Interested parties who respond to the initial contact should immediately sign a confidentiality agreement. Once executed, and if the buyer appears to be qualified, then the information memorandum can be sent for review, and both parties are free to discuss the details of the opportunity.
Conduct Q&A with buyers
Buyers rarely submit a qualified offer for a company based solely on the information memorandum. Typically, they often have additional questions. Buyers will submit questions and base their offer of the answers, request a conference call with management, or request a meeting or site visit at the office. The goal of this stage is to determine which buyers will distinguish themselves by expressing a higher level of interest and, ultimately, a qualified offer.
After receiving answers to their questions, interested buyers will submit an offer to acquire the company, indicating the price and terms that the buyer is willing to pay, any contingencies to a closing, and their funding capabilities. The offer is non-binding and subject to confirmatory due diligence of the company information already received.
Conduct management meetings
If multiple offers are received, the seller may want to conduct in-person meetings to evaluate potential buyers and determine the best candidate. It is customary during this phase for the seller to provide updated financial or other information necessary for the buyers to fine-tune their offers. After these meetings, buyers may submit a “best and final” offer. The seller may negotiate with multiple buyers, but will typically select one buyer with which to close the transaction.
Engage in due diligence
Once a letter of intent is executed with one buyer, the process of confirmatory due diligence begins. During the due diligence phase, the buyer scrutinizes all financial, operational, and legal aspects of the company with the goal of confirming what has already been presented. Imagine the class bully holding a kid upside down by his ankles to shake out everything in his pockets – that’s what due diligence is like. A buyer could assemble a small army of accountants, lawyers, and consultants to turn over every stone. Being well prepared ahead of time can help smooth the process considerably.
It’s important to note, after signing the letter of intent, a clock starts ticking. This letter will stipulate that the deal must close within a specified time frame, including conducting due diligence, and, if it doesn’t, the letter will expire and both parties are free to move on to other opportunities unless both parties agree to an extension.
Negotiate definitive purchase agreement and other agreements
While due diligence occurs, the transaction attorneys for both parties will draft and negotiate a definitive purchase agreement. It is the governing document over the proposed transaction, and, if an item is not stipulated in the agreement, it’s not a part of the deal. In addition to the purchase agreement, a buyer may also require the seller to execute an employment agreement and/or a non-solicit/non-competition agreement.
Close the deal
Closing occurs after due diligence is completed and approved, financing is secured, and all agreements are executed. If cash at closing is part of the deal, it is typically wired to the seller’s bank account at that time. As with the closing of any deal, everyone shakes hands and moves on.
This whole process typically lasts anywhere between four to six months if both parties are moving diligently toward a closing. With experienced advisors helping you navigate the bumps in the road, you can significantly improve your chances for a successful deal, and one that will bring you many years of lifestyle happiness and financial freedom.
For more information, or to schedule a confidential discussion of your business goals, contact us at firstname.lastname@example.org.