You may think that selling a business is just like selling a house: identify a buyer, support your price with comparable sales, fill out some paperwork, wire the funds and your deal is closed.
Unfortunately, selling a business isn’t quite that simple.
A house is a tangible asset that’s used for a very specific purpose: You live in it. A business, in contrast, is a complicated asset with tangible and intangible characteristics that are utilized to create future cash flow. Different assets require different processes.
The mergers and acquisitions process is designed to attract multiple buyers, creating “deal heat” and competition that will drive the price and terms. This process works so well that it’s been used for centuries by investment bankers around the world. However, if you don’t understand and engage in this process properly, you risk the possibility of selling your business at a discount, with unfavorable terms or, worse, never selling your business.
To generate the highest price for your business, you’ll want to follow this proven, seven-step process:
Define the objectives for the sale and create marketing documents. In this first step, objectives for the sale are defined, and appropriate, qualified buyers are identified. Marketing documents are created that relay the value of your business to potential buyers, including a Confidential Information Memorandum (CIM), sometimes referred to as the Offering Memorandum (OM). This robust document relays in-depth information about your company’s financials, operations, products and services. From your CIM, a Confidential Business Profile (CBP), often referred to as an Executive Summary or Teaser, is written.
Start the auction process. The CBP is distributed to your pool of buyers. Its purpose is to drive interested buyers toward signing a Non-Disclosure Agreement (NDA) or Confidentiality Agreement (CA) and requesting the full details in your CIM. Interested buyers are invited to a virtual data room to begin their preliminary due diligence and follow-up calls are scheduled to clear up any questions. Buyer interest is presented to you in a letter called an Indication of Interest (IOI). This is a nonbinding agreement that communicates a buyer’s interest in purchasing your business. It provides guidance as to the investor’s price and general points of the deal, such as the deal’s structure, financing, time frame to completion, any necessary due diligence items, and owner or management retention plans.
Prepare for site visits and management meetings. As the IOIs are analyzed, site visits or management meetings are scheduled so selected buyers can meet you and your key management team, which also allows you to gather additional information about the buyers’ intentions.
Call for offers. Offers are relayed in a Letter of Intent (LOI), which outlines fundamental terms of a deal, including price, deal structure, any contingencies (such as adherence to financial projections), a net working capital target, escrow expectations, deal funding, a projected closing and the exclusivity period for due diligence.
Negotiate and execute the LOI. All offers are reviewed and the details are negotiated, including the price, deal structure, terms and conditions, forms of payment and transition period. A tax analysis is performed for each offer. Once the offers have been evaluated, you’ll sign the winning LOI, which signals exclusivity to the buyer, who will then proceed with the due diligence phase.
Complete the final due diligence. The buyer generally will hire a third-party accounting firm to perform due diligence to substantiate the accuracy and sustainability of your company’s historical earnings and future cash flow projections. The due diligence review is comprehensive: in addition to the accounting firm’s financial review, specialists may be brought in to review property matters, personnel, legal issues, intellectual property, insurance requirements, government regulations, general corporate matters, and environmental compliance.
Negotiate the legal agreements and close. Your deal will be closed and memorialized with a Definitive Purchase Agreement (DPA), which is binding and supersedes all previous discussions and documents, including the Indication of Interest, if received, and the LOI. The DPA will include a Warranties, Representation and Indemnification (WRI) section. An M&A attorney will review and help negotiate all parts of the agreement. Indemnification Clauses, as part of the WRI, support the warranties and representations; they stipulate how a buyer will be compensated in the event of a breach of a seller’s representations and warranties resulting in a loss to the buyer.
This process is complex, and issues will inevitably arise for both you and the buyer. But if done properly and with advisement, you can meet all of your objectives and enjoy the successful sale of your business.
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