The business acquisition process can be lengthy and complicated, but fundamentally follows a simple "road map" in most cases. This guide outlines the key steps in buying a business, whether it's a corner store or a multi-million-dollar corporation.
Retain Professional Advisors
In most cases, the parties to a business acquisition will want to have legal and tax advisors. The buyer may also wish to have financial, accounting, HR, environmental, and other advisors, depending on the type and scale of the business involved.
Sign a Non-Disclosure Agreement
In most cases, the seller will want the buyer to sign an NDA before disclosing detailed information about the business. It is ideal to have legal advisors review the non-disclosure agreement to avoid pitfalls.
This allows the potential purchaser to examine the details of the business from a financial and legal perspective, to ensure that their valuation assumptions are correct. Legal due diligence for a corporate investment or acquisition starts with a series of document and information requests to management of the target business. The investor’s legal counsel then reviews the documents provided, and asks follow-up questions for clarification. Written questioning and documentary disclosures are often supplemented by telephone or in-person management interviews. The due diligence process helps confirm the proper valuation of the business, and helps in the drafting of the acquisition agreement.
Letter of Intent
This document is often required before or during due diligence in order to ensure that the buyer is legitimately interested in purchasing the business. Frequently, in exchange for manifesting their intent to purchase the business at a certain target price, the buyer will get a period of exclusivity during which the seller cannot negotiate with other potential buyers. While letters of intent are usually supposed to be "non-binding," buyers must be careful when signing them to ensure that they really are non-binding.
Depending on how the transaction is structured, the main contract may be called a share purchase agreement, merger agreement, or asset purchase agreement. This contract will typically include details about the closing process, the seller's liability regarding issues with the business, and the buyer's ability to "walk away" between signing and closing.
Many business acquisitions require multiple contracts. The package of contracts may include a shareholder agreement (if there will be multiple owners after the sale), a transitional services agreement (if the seller will need to provide some services after the sale), or executive employment agreements (if managers will need to be retained after the sale).
Closing may happen upon signing if the transaction is very simple, but in many cases, there is a need to have some time between signing and closing for regulatory procedures and remediation of issues.
Even once you "have the keys" to the business, the process may not be finished. Depending on the terms of the acquisition agreement, the buyer may have the opportunity to adjust the purchase price or claim indemnification for issues found in the business after the closing, so it can be helpful to do further due diligence once the buyer is in control of the business.
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