There are six important steps to keep in mind if you want your closing to go well. We’ll look at the process and what sellers can expect in this article. If you want to sell a business, it’s also helpful to know what the stages look like from a buyer’s point of view which we will cover as well.
- Buyer Pre-Qualification
Many business buyers and sellers perceive that the purchase and sale of a business with an intermediary is similar to the purchase and sale of a home with a real-estate agent. This common misconception can lead to frustration and misunderstandings about the role of a business intermediary.
The first, and arguably most important, first step to successfully buying or selling a business is weeding out unqualified buyers and selecting the buyer prospect that is the best fit.
A quality listing defined as being in an attractive size, industry and location that is correctly priced will have dozens and dozens of interested buyers. “Finding buyers” is not the challenge – finding the “right” buyer is the challenge.
If the prospective buyer selected is not qualified, not experienced, fails to retain quality legal counsel or lacks the financial resources to complete a transaction literally months (as the average time to close is 90-120 days) can be wasted and the seller has to start over from step one.
Sellers should not get discouraged when they see inquiry after inquiry with no written offers – it’s more likely that the intermediary is doing their job (which is extremely time consuming as each buyer requires 1 – 1.5 hours of time initially) ruling out low quality buyer prospects.
- Indication of Interest (IOI) / Letter of Intent (LOI)
The buyers transaction attorney will usually be the one who produces the written offer. The IOI/LOI is intended to outline the major transaction details to insure that the buyer and seller are in agreement before expending time and resources on extensive due diligence. These documents are almost always non-binding meaning that either party can terminate the agreement at any time for any reason. Your letter of intent should at minimum include the price, terms, and expected closing date, transition assistance details as well as other items that might be unique to the particular transaction. Details like included and excluded assets should always be scheduled including what if any liabilities the buyer will be assuming.
A properly drafted IOI/LOI will also have a due diligence expiration date and a ‘no shop’ provision which prevents the seller and the sellers broker from engaging in negotiations with other potential buyers during the due diligence period.
- Due Diligence
The process of due diligence is the most time consuming. During due diligence, you will get help from your business broker or M&A advisor, transaction attorney, accountant and lender or loan packager.
This step includes detailed review of tax returns and internal financials as well as leases, bank statements and other records. You should not expect to receive or provide lists of customers or employees. Customer concentration can and should be exchanged on a redacted basis.
Acquisition loan approval, underwriting and SBA review are conducted in parallel with due diligence.
Buyers who don’t spend enough time and effort on due diligence often have serious regrets and can lead to a failed transaction.
- Financing Approval
Most transaction involve a commercial lender as buyers prefer to use leverage in their acquisitions. In the United States, most banks require a Small Business Administration (SBA) guarantee. The buyer pays the costs and expenses for the guarantee. Bothe the buyer and seller must be approved. You may choose to work with a specific bank, but ENLIGN does not recommend this approach.
The most efficient use of your time and the way to get fastest approval with the best terms is to work with a SBA loan packager. They handle everything on your behalf for a very modest fee and know which lenders like what types of businesses in what geographies and in what price ranges increasing approval odds, reducing the time required and securing the best terms.
- Drafting of the Definitive Agreement
The binding agreement, which is commonly referred to as the definitive agreement, an asset purchase agreement or stock purchase agreement should always be drafted by an experienced transaction attorney. This document is the end all and be all and includes all of the transaction related terms and conditions. Buyers should expect to spend approximately $15,000 on an average transaction. Sellers should expect to spend at least $5,000.
There are two approaches to finalizing the binding agreement. Traditionally, the documents would be drafted and approved in advance of the closing and would not be signed until all aspects of the agreement had been finalized and funding had been secured.
More recently transaction attorneys have started having the buyer and seller execute all of the documents as soon as they were completed subject to certain contingencies like buyer financing approval. The closing attorney then holds the documents (called a transaction binder) in escrow – meaning they are not yet in full force and effect. Once all of the contingencies are cleared or waived by the respective parties the transaction attorney disperses funds and the transaction is complete.
Business Transaction Tips: When completing a business acquisition there are two types of closings. A wet closing is when the buyer and seller come together, usually in the closing attorneys conference room and “wet” sign the printed agreements in person. With the evolution of technology many closings are now conducted online electronically and referred to as “dry” closings.
Regardless of which type of closing buyers and sellers choose, separate signature pages can be collected to complete the transaction. When an attorney combines multiple signature pages among the parties its referred to as “slip sheeting”.
Summary: Knowing not just the steps, but the details of each should aid in managing the process smoothly with your business broker, M&A advisor, transaction attorney, accountant and loan packager. If you have questions or don’t understand a particular step, an experienced business broker with a Certified Business Intermediary (CBI) designation from the International Business Brokers Association (IBBA) or an M&A advisor with a Mergers and Acquisitions Master Intermediary designation from the M&A Source (MAS) will be able to address your questions in detail or refer you to the appropriate advisor.