One of the many things I love about handling business sales and acquisitions is that every deal is different. As counsel, a lot of creative problem solving is required to meeting the inevitable challenges that crop up in every transaction. That is where my decades of experience handling complex business deals adds a lot of value. While there is no “one size fits all” solution to business acquisitions, the process, broadly speaking, follows the same basic process in every deal. This can be broken down into five (5) steps.
1. Identification. Initially, it is important to establish long-term company goals. Once identified, a strategic merger or acquisition should be considered as a means of fostering a long-term plan. If an acquisition is deemed a part of the plan, then the focus shifts to determination of potential targets. This may be done directly, or through an intermediary, such as an investment banker or other professional with connections in your industry.
2. Negotiation. Once a potential target is identified, a Non-Disclosure Agreement is executed so that confidential information about each company can be exchanged without fear of confidential business information becoming public knowledge. While the negotiation process continues through the investigation phase, the initial negotiation phase, if successful, typically results in a non-binding Letter of Intent or Term Sheet, which sets forth a price and other key terms.
3. Investigation. Once the Letter of Intent has been executed, the “due diligence” process follows. In the due diligence process, significant facts about the target are investigated. This process may involve examination of aspects of the business including the following:
- Business of the target – scope of the business and its market; sales, customers, contracts, trends, growth (or lack thereof), profitability, management, assets and prospects.
- Capital Structure – ownership, senior debt, organizational documents.
- Financial statements – annual and quarterly reports, audits, and cash flow
- Assets and Liabilities – bank debt, loans, leases, and assets.
- Intellectual property – are there patents or trademarks and income from licensing agreements? What software and systems are in place?
- Selling and Marketing – analyze productivity and compensation, branding and comparative analysis, market position.
- Legal – licensing and permits, current and prior lawsuits, legal invoices, contracts and regulatory environment.
- Business plans – most recent business plans and past years to see if the company has met its goals.
- Employees – types, pay history, whether the employees are unionized, discrimination record, claim history.
- Insurance and Risk Management – Claims, losses, current and past policies.
- Prior sale efforts – have the owners tried to sell the company before, what happened?
4. Documentation. Upon the completion of due diligence, and assuming the due diligence did not turn up anything to cause the buyer to want to terminate the deal, a Purchase Agreement will be negotiated and executed. At some point the parties will agree on a stock sale or an asset sale. The Purchase Agreement at this time will set forth the sale terms: purchase price, escrows, closing adjustments, earnouts, representations and warranties of the parties, indemnification, post-sale restrictions and conditions, and other matters. Other related documents, such as Employment Agreements, Non-Competition Agreements, Assignments and Bills of Sale are negotiated. If the buyer is financing the acquisition with a third-party lender, loan documents will be negotiated along with the purchase documents. Usually in a private sale the Purchase Agreement is not signed until closing to allow the buyer to defer its final decision until the last moment. However, if third parties are involved the Purchase Agreement may be executed prior to closing.
5. Closing. The final step is the Closing. If not signed previously the closing documents are signed along with the other transfer and closing documents, the purchase price is delivered and the transaction will be closed. However in many transactions there will be post-closing adjustments to the purchase price due to accounting and other issues.
If you are in the process of acquiring a business, we can navigate you through this process to ensure your business objectives are met and that you are minimizing risk.