The 5 Stages of Buying or Selling a Business
Buying or selling a small business can be the most significant business transaction of an entrepreneur’s life.
Small businesses are unique—they are more personal, riskier, and more creative than larger, publicly held companies. Even the simplest small business acquisition will involve dozens of logistic issues and legal documents. Perkins Law has an excellent track record of closing small business deals in a timely and cost-effective manner.
Every transaction is different, but most involve these five basic stages:
Strategic Planning
Letter of Intent
Due Diligence
Document Drafting & Closing
Post-Closing
Strategic Planning
The issues addressed at the front end of any small business acquisition or sale is an in-depth discussion with the client and his or her other advisors (accountant, banker, financial advisor, etc.) concerning:
- Overall objectives for the acquisition or sale of the business
- Level of preparedness for the transaction
- Overview of the process for buying or selling a business
- The role the client wants me to play in the process
Letter of Intent
At this stage, a business owner and potential buyer have had sufficient discussions that they decide it is worthwhile to negotiate the key business terms of the deal. The relationship is often memorialized through a written letter of intent (often referred to as an “LOI”).
An LOI is typically a short document that sets forth the buyer’s and seller’s agreement on issues such as:
- Price
- Payment terms
- Deal structure (e.g., stock sale vs. asset sale)
- Due diligence details
- Confidentiality terms
- No shop or stand still provisions
- Whatever other deal points the parties can agree on at this early stage
Due Diligence
This is perhaps the most important—and most dreaded—part of the deal process.
This is a potential buyer’s opportunity to review the target company’s legal, financial, and business records to better assess the bundle of assets, liabilities, and risks it is negotiating to buy.
This is also a seller’s opportunity to demonstrate the value of the business and assets being sold and minimize the buyer’s efforts to negotiate reductions to the purchase price and other concessions.
Document Drafting & Closing
Once the due diligence stage ends and the parties are locked into the deal, then it is time to prepare the definitive acquisition documents and address all the logistics necessary for closing.
If all goes well, closing day is anti-climatic:
- Documents are signed
- Signature pages exchanged
- Funds are transferred
If any lingering issues could not be addressed prior to closing, the parties will enter into a side letter agreement or post-closing agreement to address those items.
Post Closing
The amount and type of issues requiring attention after a deal closes varies on a case-by-case basis.
Sometimes, additional documents require signatures, documents will need to be recorded or filed with the state or local clerk’s office, and closing document binders will need to be prepared.