Buying and Selling a Business
The First in a Series
At some point during the career of an entrepreneur, he or she will either purchase or sell a business. This process can be quite overwhelming. To the uninitiated, the scope of the issues involved in the sale of even the smallest business are frequently underestimated.
Over the next several weeks, we will be talking about some of the steps that occur in the typical sale of a business. We will start today by giving an overview of the six general phases of an acquisition transaction with later articles digging into each in turn.
While every deal is different, they tend to fall into six phases. These may be described as follows:
· Non-Disclosure Agreement or Confidentiality Agreement
· Letter of Intent or Term Sheet
· Due Diligence
· Documenting the Transaction as either an Asset Purchase, Merger, or Stock Purchase
· Post-Closing Adjustments and Similar Matters
Throughout each of these phases, the purchaser should keep an eye on three objectives. The first is to make sure that what the purchaser is buying is what it thinks it is buying. This would include questions such as “What assets are included?”, “What is the historic and future revenue potential?”, and “How has the business been operated in the past?”.
The second objective is to be sure that during the course of the transaction the value is preserved. This would include considerations such as “What will be the effect on the customers by having new ownership?”, “Will the seller continue to operate the business during the transaction cycle in a way that preserves value?”, and “What assistance do I need after the closing from the seller in order to make this transition as smooth as possible?”.
Finally, the purchaser needs to be sure that it is taking no more liability than it intended and had worked into the business model used to support the decision to make the acquisition. This involves questions such as “What are the liabilities that the purchaser will voluntarily assume?”, “What are the off balance sheet liabilities of the business, such as intellectual property infringement claims, tort claims, employment related matters, environmental issues, warranty or products liability claims?”, and the like.
Throughout each of these phases the seller will want to keep its eye on understanding and preserving the purchase price. This includes understanding exactly how payment will be made, the terms of any earn-outs included in the price, post-closing price adjustments, and the liabilities being assumed by the purchaser and those being retained by the seller.
And, of course, both parties will also want to make the transaction as tax efficient as possible.
We will look at how these and other objectives can be met in each of the phases in future articles. Next time we will begin by looking at considerations concerning confidentiality that should be addressed at the outset of any discussion regarding an acquisition transaction.