35 Steps in Selling a Business – Stage 4 of 4: Closing
Closing: The Last 8 Steps in Selling a Business
Whether you are trying to sell your business by yourself, or you hire a professional to guide you through the process, there are four major stages of selling a business: Planning, Searching, Deal Making, and Closing. I will provide some explanation for each of the detailed steps in these four stages in a series of four discussions. Here are the steps in the 4th stage – Closing:
Accounting/Legal Assistance: The buyer and seller are responsible for their own professional assistance in business acquisition transactions. The buyer’s accountant and his attorney will submit a list of due diligence questions, and a request for documents, from the seller. And, the buyer’s attorney is responsible for preparing the closing documents (including the purchase agreement, non-compete agreement, employment agreement, consulting agreement, etc.) and submitting them to the seller for approval. Because of this protocol, the buyer’s professional fees are likely to be somewhat higher than the seller’s. Those buyers who try to skip these steps, or do it themselves, is like the guy on the TV commercial who is tempted to perform his own appendectomy. This is not a time to save money.
Due Diligence: This step in the Closing stage is often confusing to both buyers and sellers. Basically, Due Diligence refers to the care a reasonable person should take before entering into an agreement or a transaction with another party. This step provides the buyer, who has already successfully negotiated a Letter of Intent or Term Sheet with the seller, an opportunity to: (i) verify/confirm, by examining original detailed documentation, all the information that has been provided by the seller, and (ii) probe deeper into the business in order to uncover significant potential pitfalls that might otherwise be discovered after closing. Sellers can also perform a due diligence analysis on the buyer. Items that may be considered are the buyer’s ability to purchase, as well as other items that would affect the purchased entity or the seller after the sale is completed.
Buyer Financing: Most business acquisitions for companies valued under $5 million are financed by an SBA-approved bank, and those valued between $5M and $20M are usually financed by some combination of mezzanine financing, coupled with traditional asset-based bank lending. In both cases, there is usually some requirement for a down payment/cash injection by the buyer of about 15-30% of the purchase price. Often, buyers request some seller financing – spread out over 3 to 5 years, as a way to enlist the best efforts of the seller to make the buyer a success. However, any amount of seller financing greater than 20% of the transaction value causes the seller to look elsewhere for a new buyer, because the seller has been asked to take on too much risk without any collateral.
Buyer Prepares Purchase Agreement: In order to close the acquisition transaction, there must be a final Purchase Agreement, which documents, in fine detail, all the points in the Letter of Intent (LOI) – and more. Since the buyer is usually the party at greater risk, his attorney will prepare the Purchase Agreement, with the most protections imbedded to reduce his client’s risk. While the LOI outlines the important details of almost every acquisition transaction, it is only after the completion of the due diligence stage that a complete picture emerges, revealing all the points that must be addressed by the buyer and seller. If the due diligence of both parties has been completed as planned, both parties with have become comfortable with the relative risks of the transaction, and will have learned much about the needs and wants of the other party. This understanding will be helpful in negotiating the many sticky details of the final purchase agreement.
Negotiation of Terms: There are two separate groupings of “terms” in the purchase of a business, and most of these terms can be difficult to negotiate.
The first group of terms includes the basics of a Letter of Intent [LOI] or Term Sheet: Price, amount of Cash at Closing, amount of any Earn-out, and the interest rate and payback details of any Seller Note. By their very nature, LOI’s are prepared with broad language to prevent the parties from being bogged down in the negotiation of details before the due diligence process has even started.
The second group of terms are included in the package of closing documents – questions that contain details that need to be negotiated, such as: (i) Is the transaction going to be a Stock or Asset Purchase; and complex details regarding the: (ii) Assumption of Liabilities; (iii) Allocation of Purchase Price; (iv) Working Capital Adjustment; (v) [Seller] Representations and Warranties; (vi) Contingencies; (vii) Employee Agreements, (viii) Consulting Agreement, (ix) Non-Compete Agreement; (x) Promissory Note; (xi) Escrow Agreement, (xii) Earn Out Agreement, etc.
Review of Final Documents: At some time before Closing, the buyer and seller need to review all the documents that are to be signed. And, while many documents are reviewed by the buyer and seller for the purchase/sale of a home, the closing documents in a business acquisition transaction are much longer, and more complex, than for the sale of a home. Thus, these final documents must be reviewed by the buyer and seller with their respective legal counsel [often taking a number of hours] to make sure both parties understand and agree with all the details.
Closing: While both parties usually review all the final closing documents prior to the closing, two or three new issues often develop that need to be resolved. Many of these issues involve calculations that can only be performed on the day of closing [e.g. a physical count of the inventory on hand, including the pricing of each item], because they will impact the amount of cash due to the seller. Also, last minute issues pop up because of paperwork that might not have been received from other parties, which might require side agreements for resolution after closing. If the buyer and seller have worked together to resolve the big issues during due diligence and the negotiation of the major closing documents, these last minute details can be resolved quickly. After all issues are resolved, and the closing documents are signed, the funds are wired to the seller’s account – and the ownership of the business has been transferred.
Transition Period: No buyer wants to see the seller driving his new red Jaguar into the sunset after the closing. So most business acquisition transactions ensure the seller’s continued involvement in the business for some period of transition – with an employment agreement and/or seller note. During the initial transition period [starting with 30 days at no charge, or up to one or more years with various comp plans], the seller will help transfer the loyalty of customers and employees to the new owner, assist in setting up accounts with vendors, and orient the new owner to company policies, operations, and procedures.
The longer transition periods are usually established when the seller has a unique set of skills or knowledge that will take time to replace. But most buyers are concerned about a transition period that is too short, because they are concerned they might not be fully prepared to be on their own; and most sellers feel the buyer will need a lot of time to be able to run the business as they did. However, in most cases, buyers quickly grasp the important issues and details to run the operation in a short time period, and just want to owner to get out of the way. And the seller is dismayed to see the changes being made to how he ran the business, and needs to be pushed out.
Most important to the business, with long transaction periods, the employees remained confused about who they actually report to, and are best served with a quick on-site transition period – with telephone consultation with the seller on an as-needed basis.
If you’re interested in receiving a one-page PDF summary of all 35 steps in the 4 stages of selling a business, email Tom MacPherson and paste “Sequence of Steps in Selling a Business” in the Subject line.
The Summit Acquisitions Group — Business Brokers and M&A Advisors — specializes in the sale, appraisal, and financing of privately owned companies ranging in valuation from $750,000 to $25,000,000. Contact their offices in Atlanta, GA or Charlotte, NC for a free consultation.