Closing the Deal: Part 1
Buying or selling a business for the first time can be overwhelming. The seller is often still busy running the business and may have an emotional attachment to it. The buyer is about to make a serious financial commitment and is facing a lot of unknowns. The process can be long and stressful for everyone involved. Therefore, it is important for all parties to remain patient and keep working toward the end goal: closing the deal.
Closing the Deal: A Marathon, Not a Sprint
As with many things in life, preparation is key to success. For a seller, this means knowing what questions a buyer is likely to ask. By anticipating these requests, buyers can prepare the answers ahead of time. This may include organizing historical financial information and building a business plan. Getting these steps out of the way in advance leads to a quicker and more transparent process. For more information on what to focus on as you prepare your business for sale, see our other posts, Three Things Buyers Look For and Importance of Cash Flow, which cover this topic in more detail.
If you are a first-time buyer, it is crucial to demonstrate your seriousness to the seller. By describing your background, interest in the industry, and ability to fund the purchase price, you will go a long way toward reassuring the seller that you aren’t just window shopping. At Firm Exchange, you’ll be able to stand out using our detailed profile template. Whenever you inquire about a business, the seller views your profile and evaluates whether or not there is potential for a good fit.
We’ve broken the deal making process into four stages. Remember: each business and sales process is unique, but it’s still important to understand the steps they all have in common. The following stages can serve as reference points to keep in mind as you work through the process. In Closing the Deal: Part 2, coming next week, we will go into more detail on the preparation for, and execution of, the due diligence process.
1) Getting Started
The buyer and seller, having decided to open a dialogue, should focus on getting acquainted with one another. Both parties should use this time to decide if a deeper conversation about the business would be fruitful. This is a chance for the buyer to ask the seller any high-level questions he or she may have. For example, many buyers would ask a seller, “Have you told your employees, customers, or suppliers of your plans to sell the business?”
In addition to answering questions, the seller can look to share other information about the company not included in the listing. When everyone is comfortable moving forward, the parties may sign a non-disclosure agreement (NDA). An NDA can help protect the seller against the misuse of any information shared during the due diligence process. Before proceeding to the next stage, the seller should consider setting expectations for the buyer regarding the desired timeline, milestones, price, due diligence process, etc.
2) Due Diligence
After a decision is reached regarding confidentiality, the main due diligence process begins. By using our proprietary Diligence Center, buyers and sellers can seamlessly discuss the business and the transaction. We will cover this process in more detail next week in Part 2 of this post.
To ensure as smooth a process as possible, the seller should attempt to respond as quickly and thoroughly as possible. In addition to speeding up the process, quick responses demonstrate the seller’s understanding of the business. During this stage, the seller should look to provide whatever documents and information the buyer needs to determine the price he is willing to pay. Even with a signed NDA, sellers may want to withhold the information most sensitive to the business such as employee lists, salaries, and trade secrets.
3) Offer Made
After the buyer has completed enough due diligence to support the offering price and terms, it may be time to make an offer. The offer can take a number of different shapes, the most formal of which is a Letter of Intent (LOI). The LOI is a document that formally outlines a few important details: the price the buyer is willing to pay, any remaining information needed for close, final due diligence items, and expected time to close. If the seller is satisfied, the parties may move toward the negotiation of a final purchase agreement. That agreement can include some of the key information related to the transaction:
- Purchase price and terms of the sale
- Assets included in the purchase
- Liabilities assumed by the buyer
- Representations and warranties to protect the seller and buyer after closing the transaction
- Terms of any restrictive clauses, such as non-solicitation and non-compete agreements
Once the final purchase agreement is signed, the parties are well on their way to closing the deal. If there are any contingencies in the contract, such as the buyer requiring financing to be able to afford the purchase price, the seller may seek to include a break-up fee or the payment of earnest money.
4) Under Contract
Each issue resolved brings both parties closer to closing the deal. As is usually the case in real estate, buyers and sellers may elect to use an escrow service and closing attorney to execute the final closing. Handing over a business is often a complicated process and requires signing and submitting many documents. Where able, utilize the resources available to you to make sure you close your deal efficiently and correctly.
At Firm Exchange, we designed our Exchange Space platform to substantially assist buyers and sellers through the deal process. However, many will likely find that they need more help. Search our Professional Directory to find a business broker or other advisor who can help you manage the entire process.
Still looking for more information on the due diligence process? Click here for “Closing the Deal Part 2,” which dives deeper into conducting due diligence.
DISCLAIMER: The information contained in this article is for informational and discussion purposes only, and should not be relied upon without seeking your own professional advice. The Firm Exchange, LLC is not a law firm, accounting firm or professional services firm, and accordingly it disclaims any liability for any reliance on the contents of this article. As each situation is unique, you are encouraged to discuss your specific situation with a qualified attorney, accountant and/or other relevant professional services provider.