How to Purchase (or Sell) a Business Now in 5 Steps
So you want to purchase a business but you are not sure how to go about the process and close the purchase in the right way.
LAW OFFICES OF RYAN REIFFERT PLLC has published this guide to help you in this high-stakes process. Based on our experience in this sector, there are 5 major steps to consider while you are taking this important (and, hopefully, exciting!) journey. My background in M&A allows me to counsel you to a streamlined process and a good result.
Every buyer and seller must know and consider the following for a smooth transaction.
Purchase a Business in 5 Steps
- Due diligence
- Select Acquisition Structure
- Post-Closing Matters
Step One: Matchmaking
The first stage of dealmaking is more ill-defined than the others. Every company can be, in a sense, said to be in the “matchmaking” phase more or less constantly throughout its lifetime.
“But that’s silly,” you might say, “surely not every company is always thinking about making a deal. Sometimes they just want to go about their business and make their money.”
Sure, but what I mean by that is: every company is potentially a candidate for an unsolicited overture from another company. If your business received an unsolicited offer for TEN TIMES what the business is “worth” I’m willing to bet you’d at least give it some thought. Perhaps you’d ultimately accept or perhaps you’d ultimately decline. But I’ll wager you’d at the very least consider taking the money. And at that point, you’d be in the matchmaking phase of dealmaking. Other times, a company may intentionally put itself up for sale, perhaps engaging investment bankers to run the sale and openly soliciting bids.
In either case, the “matchmaking” part of an acquisition will often take the form of discrete, high-level discussions between senior management and/or board members of one company to senior management and/or board members of the other. Investment bankers may or may not be directly involved, and attorneys may or may not be directly involved (although the odds are good that they will be, at minimum, indirectly contributing to discussions).
At this stage in the purchase, the main focus is on whether the business combination makes sense from a conceptual perspective. There is generally not (yet) a significant amount of legal work to do, and the details of the purchase will not have come into focus (yet). At this stage, the role of a corporate lawyer is that of advisor and consultant to the buyer or seller.
Many, many deals do not progress past this “matchmaking” stage, or they may visit and revisit this stage – perhaps an initial confidential conversation happens between buyer and seller, and one is not interested. No deal. Or, perhaps one or the other is interested, but the timing or valuation is not yet quite right. No deal. The point is, if your initial confidential overture is not productive, it is important not to despair. A roadblock at this stage is not necessarily final and permanent.
“Business opportunities are like buses; there’s always another one coming”
Step Two: Due Diligence
Once the parties have reached some sort of common conceptual understanding that a deal might make sense, it’s time to bring that conceptual agreement into the real world. This happens through due diligence.
Due diligence is the principal period to evaluate the business before making the decision to buy. It is the common process in which each party looks at the capacity of the other party to convey what was guaranteed and to take some basic precautions to avoid unexpected scenarios and unwelcome surprises to both sides.
Fun Fact: the phrase “due diligence” is also a term of art from a relatively different legal concept in securities law, related to liability protections for underwriters. So, if you hear “due diligence” in a securities context rather than a strictly M&A context, be aware that it could mean something a little different.
You can think of due diligence as the “kicking the tires” phase of buying a car or the “home inspection” phase of buying a house. If you’re looking at the car or the house from the street, you may get one picture. But once you look under the hood, or get past the locked front door, you get a much more in-depth look at things… and that’s not to say there can’t be some hidden problems (there can be), but you’ll have a much better chance to discover them compared to just looking at it from the street.
The due diligence phase of an acquisition or merger is also the phase where parties are most likely to execute confidentiality agreements and other deal documents such as exclusivity agreements, standstill agreements, lockups, shareholder agreements, and much more. It can also be a very expensive phase, as a major expenditure of time and expense by attorneys, staff, bankers, accountants, and other technical specialists may be required to make sense of the other party’s situation. But, compared to the cost of purchasing a business with hidden traps, problems or other liabilities, a quality due diligence exercise is an excellent investment.
Corporate due diligence is very possibly the most serious and critical stage in deciding whether the deal is right and would be beneficial for both the parties. Many deals fail to make it past the due diligence phase, for one reason or another – this could be anything from one party declining to share key information (“what are you hiding and why?”), to a party discovering a nasty skeleton in the closet (aren’t you glad you did your diligence?), to a re-evaluation of price or deal terms in a way that breaks the previous agreement of the parties (“sorry, but we can’t pay you what we thought we could before, because of that undisclosed liability” “OK, then no deal”).
And that’s OK. That’s why you spend the time at this step. Better to abort a deal after some diligence than get a seven-, eight-, or nine-figure case of buyer’s remorse!
Due Diligence is like eating your vegetables…
it might not be the most fun part of the meal
(or the deal) , but you’ll be glad you did it.
In many situations, Law Offices of Ryan Reiffert can handle the entire legal due diligence process for one party to the contract. Other times, we have been brought in as co-counsel when a particularly complex corporate matter presents itself, or when, quite simply, more “firepower” is needed.
Ultimately, though due diligence is a big process, it helps us know what our client is really looking forward to accomplishing by doing the deal (in industry parlance, identifying the “deal drivers”), and to counsel our clients on possible benefits and synergies versus the possible dangers and risk exposure.
In addition, buy-side diligence and sell-side diligence are asymmetric.
A buyer is concerned about kicking the tires as mentioned above – which, reduced to its simplest form is the question “am I getting what I think I’m getting, and what I’m paying for?”. It is catechism among deal lawyers that reps and warranties don’t survive the closing. So, rather than solely relying on the seller’s bringdown certificate, the buyer needs to do its own homework on what’s there. This is essentially a hunt to discover hidden traps and dangers by digging into the contracts, regulatory issues, and finances.
A seller, on the other hand, can have a more varied set of concerns. Of course, the seller must not only make organized and clear disclosure to the buyer to expedite the process, but the seller’s disclosure obligations as reflected in the schedules to the definitive acquisition agreement must be done correctly. Neglecting to include a material item in an exception schedule could be equivalent to giving your counterparty a walk-away option. But there could be many other concerns, from reviewing the buyer’s financial condition in a stock-stock deal, to identifying information that should not be disclosed until after closing (for example, trade secrets, pricing data, or customer lists whose disclosure would cause problems if the deal were to fail to close)
Step Two (part a): Buy Side Diligence
We work with your managers and C-suite, as well as financial and technical professionals before the client purchases a business to identify both “deal drivers” and “pain points”.
This work includes a review of regulatory, financial, contractual, and technical obligations as well as an analysis of uninsured and insured liability of the contemplated deal. Many times, particularly in the case of closely-held businesses being sold by their founders, the identity of the seller and the identity of the business have become firmly intertwined. In such cases, during the diligence process we can identify the specific arrangements (noncompetes, nondisclosures, ongoing service contracts, and so forth) that will be appropriate to separate the two and allow a genuine sale of the business.
Another somewhat common element for closely-held business, on the purchase side, is negotiating more nuanced elements of deal pricing such as earn-outs and clawbacks. These can be particularly valuable where the valuation of the target is not quite fully agreed, or to properly incentivize the founder during the ongoing service period.
Step Two (part b): Sell Side Diligence
Our due diligence helps the seller to negotiate, understand, and meet its (potentially fulsome) disclosure obligations but also gauge the buyer’s willingness and the ability to perform its obligations under the contract. We are not only concerned with meaningful and clear disclosure to “get the deal done” (although that is obviously a high priority), but also, to ensure we negotiate the correct transaction structure for the sale.
In other words, with proper due diligence, we organize each deal as that particular deal should be organized, based on the relevant concerns. Not least of which is that in a competitive market place, the seller always needs to protect against those buyers who are shopping to collect inside information regarding the market and trade secrets that the seller may have developed. In this situation, we would recognize a need for a remedy to the unnecessary revelation of trade secrets, and potential other remedies for breach of contractual obligations.
Step Three: Select Acquisition Structure
This is the second step to purchase a business.
Many times, based on either the initial discussions or based on discoveries made during due diligence and/or the seller’s disclosures, it will become clear that the buyer ought not buy the equity of the seller (perhaps there are legacy liabilities, or a hidden regulatory issue).
Don’t despair! All is not lost!
On such an occasion, we can restructure the deal to be an asset sale, or a partial asset sale, rather than a merger or stock purchase. It could be tangible business assets like trucks, machines, barrels of oil, or computers. It could be intangible assets like intellectual property (IP) rights, customer records, or assignments of contracts.
This step of the acquisition process will also be critical for allocating risk! If something unforeseen happens, who bears the consequence of that? For example, force majeure clauses.
As before, the organization and structure of the deal depends on the deal – it is individual and unique and no two are alike. There is no fill-in-the-blank form or easy formula that allows somebody to purchase a business. It can be a messy thing. But, the good news is that I have the deal experience to help you make sense of it. I have helped sign, organize, structure, and close everything from multi-billion dollar corporate deals to small startup investments.
Where there was a messy, muddled, complicated thing, I bring clarity, organization, strategy, and vision. And while you’ll hear me say “there’s no such thing as a guarantee in this business,” I can help you obtain appropriate assurances, allocate risk correctly, and get the deal done.
Step Four: Closing
What does closing mean? Quite simply, closing is when they money moves. It’s when “the deal gets done.”
You can have a fantastic deal document, a great buyer, a willing seller, and the best intentions in the world, but if you can’t satisfy the conditions to closing, the deal will not happen. This is why it’s absolutely critical to have a competent business attorney in your side during the deal. The last thing you want, as a buyer or as a seller, is to get stuck in the purgatory of being subject to the executory period of an acquisition agreement, unsure of whether the deal will close or not.
A whole host of things will often have to happen in order for the deal to close (again, every deal is different, so the closing conditions will depend upon the deal documents, and the deal documents will depend upon what makes sense under the circumstances).
- various certificates generally will have to be provided
- confirmatory diligence may have to be completed
- regulatory approvals may have to be obtained
- if there was a financing contingency, the bank’s diligence and approval will have to be satisfied
- a material adverse effect generally must not have occurred
- the reps and warranties must remain true (and be certified as such)
- board approval or shareholder approval must have been obtained
- security interests, if any, must have been appropriately handled
- compliance with applicable laws must have been evaluated and confirmed
- consents to material contract assignments, if any, must have been obtained
- and much more…
Those who have been in the sales arena understand the value of a good “closer” – and in light of the list above, you can see why. This is what Law Offices of Ryan Reiffert brings to the table. We’ll swiftly get the deal closed, or swiftly determine why it can’t close and sound the alarm so that the purchase can proceed, or be called off and the parties can explore their next best options.
Step Five: Post-Closing Matters (Integration, Covenants, Warranties, and Much More)
For a seller of a closely-held business, or a multi-generation family business, or a business where the owner has started from nothing, the closing can be a little bit like losing a family member or a beloved pet. The emotional impact of parting with your “baby” is real, and is more impactful than simply ink on a contract. Our experience in these kinds of business successions cases makes sure that the deal is going to be smooth for all parties.
We take some extra steps to purchase a business properly when dealing with this kind of closely-held situation. Law Offices of Ryan Reiffert understand that in these kinds of cases the ownership, clients, and customers should be treated with honor, politeness, and kindness, beyond what is strictly required under the law, because they have an emotional attachment with the business.
“a satisfied customer is the best business strategy of all”
rings very true in this context.
In such cases, while working with buyers, we also work to maintain the rights of previous owners and management, the reputation of the business, and much more. As with any deal, there is no one-size-fits-all remedy.
While working with sellers, conversely, we make sure that the old management and owner of that business are leaving that business with great positioning to start their next chapter in business and life.
These remedies often include things such as:
- post-closing covenants
- clawbacks, earnouts, and long-term employment contracts
- consulting agreements
- transition service agreements
- post-closing nondisclosure agreements
- noncompete agreements
- nonsolicitation agreements
Retaining competent corporate counsel to negotiate and draft these agreements is critically important. Including a term in one of these documents that is overly aggressive can potentially void the agreement, leaving you in a worse position than when you started. Not to mention the expense and hassle of a court fight!
We are looking forward to working with you if you are willing to sell or purchase a business. Contact us now.