Part 5: The Transaction Process
From IOI to APA
The business sale process can be complex, confusing, and draining. But it can be made much easier if you understand the path and plan accordingly. Below we discuss what to expect and who to engage at what point to save you time and money.
1. Getting ready to sell:
If you have been following this series of articles, you know that planning for the business starts years ahead of the actual sale. The best thing you can do to prepare for the sale is to organize and document everything about your business in advance. Assuming you have that ready, one of the first questions is whether to hire a broker/investment banker or not. Brokers/bankers can help you prepare your business for sale by putting together marketing materials, asking the right questions to you, and the better ones will manage the end-to-end process. The best brokers/bankers will also have access to the right buyers for you and can drive up the transaction value of your business by running an auction. But their services can be quite expensive as well. Most bankers will charge some sort of a retainer fee and anywhere as much as 10% of the total transaction value. Also be mindful of what is the banker's motivation. In some cases, the banker has and wants to build a long-term relationship with a serial buyer. The banker's perfect buyer may not be the best buyer for you.
My advice is that if you have a buyer that is interested and is willing to give you what you want, you can probably skip the broker/banker route. But if you are approaching the sale ground up and already have too much on your plate, be selective and pick a partner who has experience in your industry and your transaction size range.
I also highly recommend that you bring on a professional M&A accounting firm and legal team to help you through this process. The accountants and lawyers can be immensely helpful in identifying early problem potential areas. A smart seller will not necessarily hire such firms on retainer but will get them involved early on and pull in these resources as needed during the diligence phase. Hiring such resources can be expensive, but they can make the negotiation, accounting, and legal aspects of the transaction much easier and are well worth the costs.
2. Courting buyers:
Once you start showcasing your business, you will meet buyers who will want to ask you all kinds of questions about your business. This is your opportunity to highlight the best parts of your business.
The interested buyers will submit an Indication of Interest (IOI), or a Letter of Intent (LOI). This letter will outline the transaction at a high level, and at a minimum should indicate the valuation, the assumptions behind the valuation, a high-level structure of the transaction, and any other key terms. Most LOIs will also ask for an exclusivity period, 60-120 days, during which you may not market the business to others and allow the buyer to conduct due diligence.
The LOI is a non-binding document in most cases, allowing either party to discontinue the transaction process at any time. Still, it is a serious commitment from both parties to dedicate time and resources towards completing the transaction.
3. Due diligence:
This is likely the toughest part of the transaction process as the buyer will ask for a mountain of information from you. This is when you can rely upon your accounting team to provide financial data, but also be prepared to walk through every contract, every insurance policy, product detail, employee background, and more. Keep in mind that the buyer is most likely not trying to play “gotcha” with you. If the buyer has come this far with you, they are eager to close the transaction as well. But there is naturally a big information gap between what you know and what the buyer knows and the due diligence process is meant to narrow that gap. A well run and through diligence process is beneficial to both parties as it makes the transition easier and reduces the chances of post-transaction litigation. Please feel free to contact me, for a typical diligence list.
4. Purchase Agreement:
The transaction closes when both parties sign a final purchase agreement. The purchase agreement will be a far more detailed and legally binding document that builds upon the LOI. The Purchase Agreement will typically be drafted by the buyers and should be reviewed by your lawyers and yourself in detail. Buyers often expect the LOI to be the final agreement and are surprised at how many terms and details are added to the Purchase Agreement. Be prepared to learn about working capital true-ups, representations and warranties, escrow terms, and more. This is where having a good M&A lawyer becomes extremely important.
Anticipate that the transaction process will take longer than expected to close. Competing priorities, diligence issues, and unexpected delays tend to creep up during most transactions. Also expect the process to be stressful and emotional. However, ultimately the transaction is taking place between two entities, and the more trust, transparency, and alignment in goals there is from the onset, the more seamless the transaction will be.