What Can I Expect When Selling a Business?

The prospect of selling a business can be both exciting and daunting. This general overview walks you through the typical purchase process for small and mid-market sellers.

Letter of Intent (LOI)

After initial conversations on the prospect of engaging in a sale, the prospective buyer will send the seller a Letter of Intent (LOI) to purchase the business. This is an agreement that is generally non-binding but sets the stage for more formal agreements to come. The LOI typically includes details on sales price and employees, etc.

Often, there is a Non-disclosure Agreement (NDA) portion of the agreement. This part of the agreement is binding. The NDA protects the buyer and seller from sharing or misusing sensitive information as they exchange company data. The LOI functions as a baseline for the definitive agreements that arise later in the sales process.

It is best to consult a lawyer specialized in M&A law before disclosing any sensitive information about your business or signing any agreements.

Due Diligence

By this point, you will want to make sure you have your company’s house in order. Get your contracts, financial documents, and employee data organized and ready to share with the potential buyer. The buyer will review your internal documents to discover all the details of the business they are considering buying and how it operates. They will usually want these documents in one place that is easy to find.

The Definitive Purchase Agreement

This is the critical step where the buyer and seller agree upon the final sales price, representations, warranties, and covenants the parties are going will agree to post-closing. This is usually when the buyer and seller engage in a tug-of-war where the buyer attempts to maximize the warranties and the seller tries to minimize them. This is a critical point in the negotiation process. Covenants not to compete are also typically negotiated at this time.

Closing

One of the key components for the seller is discovering how to maximize the amount they are paid for a business. Sometimes a buyer and seller will agree to something called an “earnout arrangement” where a portion of the sale price is conditioned on the performance of the business post-closing.

While finishing definitive agreements, the parties will work on post-closing covenants. Soon after closing, the buyer often asks the seller to help with a variety of transition issues. At times, this also means involvement in continuing sales momentum for the business. One issue that the seller can anticipate at this time is how earnouts are calculated post-closing.

All transactions are different and with decades of M&A expertise, we can give each case the custom attention it deserves. Contact us today for a consultation on the prospective sale of your business.