What are the steps of buying a business? Do you just exchange money and sign a few documents? How do you know if you should buy a particular business? How many questions do you get to ask about a business for buying as a buyer? If you are asking these questions, this article is for you.
First Things, First: Initial Discussions
The initial stage of buying a business is pretty informal. The buyer and seller will talk about the viability of the deal, gauge the interest of the other parties, and the seller may even provide financial information. During this phase, the seller may ask the buyer to sign a non-disclosure agreement (NDA) if the seller is sharing sensitive information with the buyer, especially if that information is related to finances. If the seller is represented by a business broker, then the broker may help the discussions and act as an intermediary between the buyer and seller.
Valuation of the business also often happens during this stage. The seller will provide its EBIDTA and the buyer will take this information to her accountant to see if the financial calculation adds up. Based on the numbers, the buyer and seller will agree on a tentative purchase price.
Next: The Letter of Intent (LOI)
Once the buyer and seller both see that the transaction is beneficial for both of them and they are serious, the buyer will present a letter of intent (LOI) which includes the purchase price. LOIs are meant to be non-binding and outline the basic terms of the deal such as price, due diligence, the timeline for due diligence, confidentiality, and outlining whether the transaction is a stock sale versus an asset sale.
Although LOIs are intended to be non-binding, they should be skillfully written to make sure that legally they are non-binding. If it’s not written properly, it could still be an enforceable contract. Also, as a practical matter, just because the LOI is non-binding regarding whether the sale will proceed, it should still be taken seriously. As we explain in this blog post about LOIs, the terms of the LOI do typically make their way into the final purchase agreement and are the backbone of the negotiation.
Once the LOI is signed, the buy gets to do “due diligence” to learn more about the “inside” information about the business such as the financial health, and potential liabilities, making sure the seller is up to do code, if applicable. This process starts with the buyer’s attorney sending to the seller a long list of documents that the seller should turn over. The buyer should also have an accountant review the financial health of the seller’s business as well. This process could take 2-6 months depending on how big the sale is.
At the tail end of due diligence, the buyer’s attorney writes up the purchase agreement which outlines the terms of the sale in more detail, including clarifying all of the representations, warranties, and contingencies. These terms are often drawn from the findings from the due diligence and negotiations of the buyer and seller. Here the lawyers will go back and forth and further negotiate the deal and there maybe multiple rounds of the purchase agreement.
Similar to real estate closings, the buyer and seller set a date for when money and deliverables are exchanged. The buyer will send the money and the seller will deliver certain transfer documents such as assignment and assumption agreements, bills of sale, assignment of stock, intellectual property assignment, and whatever else is necessary. Sometimes the signing of the purchase agreement and the closing happen at the same.