Many people are looking to buy or exit from a business with revenue from $2 million to $20 million. These are at the lower end of the middle market. I have seen it done very simply between a benevolent owner and an employee, as well as more formally when selling a 50-year business to those building a portfolio of business investments. At this size, it is still important to understand 7 key documents and processes. Unfortunately, too few companies are able to run this hurdle race and exit successfully.
Whether you’re a seasoned entrepreneur or a first-time business acquirer, understanding these documents is crucial for a smooth and successful transaction. So, let’s get started!
- Teaser
The first step in the process deals with letting people know that a business is for sale in full, or partially. Just as we talk about click-bait on the internet, the teaser is a document intended to get a purchaser to take the next step. There is some good information on the content of a teaser, the length of teaser, and the preferred document type from axial.net
(https://www.axial.net/forum/building-an-effective-teaser-insights-from-axial-investors/?utm_campaign=MMR Newsletter&utm_medium=email&_hsmi=334638487&utm_content=334638487&utm_source=hs_email)
For a very low end of the middle market, you can see an example of a teaser on BizBuySell.com I’m not sure how long this teaser will be available (https://www.bizbuysell.com/Business-Opportunity/70-year-old-aerospace-machine-shop/2313639/)
At the other end of the middle market, dadavidson.com is a resource specializing in M&A (Mergers & Acquisitions). It’s a bit of an effort to find the material at
From my perspective it’s called buy/sell when small and M&A when bigger. A few key items are to include sufficient information to help someone assess their interest level based on their investment criteria and to avoid making it easily known who the company is, partially, so employees don’t get wind of the possible sale.
The main point of the teaser is to get the potential acquirer/buyer to submit name and contact information requesting more information following the signing of the next document, the Non-Disclosure Agreement)
2. Non-Disclosure Agreement (NDA)
Before the Non-Disclosure Agreement is sent to the potential buyer, the seller will review the buyer. Often, they do not want to send this to a known competitor. For the potential buyer, I find these documents to be very similar and you cannot take the next step without signing it. Since I am not a lawyer, I guess I must advise that you have a lawyer review the NDA before signing it. But, I will ask if you review all the terms and policies on the internet every time you ask for information or sign up for a subscription. You will have to assess the risk of signing something you either do not read thoroughly or do not understand. I sign many such documents to protect my clients’ information. I look at it as I have two eyes, two ears, and one mouth that should be kept closed fingers that should not send information out.
So, this is a qualification step by the seller to determine if sending more sensitive information is warranted. The next step is to receive a more extensive document, the Confidential Information Memorandus (CIM).
3. Confidential Information Memorandum (CIM) (pronounced with a soft C as sim)
Once a buyer expresses serious interest, the seller sends this more detailed and sensitive document. It serves as a comprehensive overview of the business, highlighting its strengths, financials, and future growth potential. Consider the CIM a detailed sales pitch for your company. In my experience, it could be as extensive as a full business or strategic plan. However, that level of information is more often left to due diligence in step 4. If the ideal teaser is just 1-3 pages in length, the CIM is more like 20-100 pages. MergersandInquisitions.com has some good information on the organization, content, and samples at
I like their humor in calling it “inquisition,” as that is what it will feel like when you go through due diligence in step 6.
4. Indication of Interest (IOI) (pronounced eye oh eye)
The buyer responds to the CIM with an indication of interest (IOI). This non-binding document outlines the buyer’s preliminary offer, including the purchase price and deal structure. It’s essentially the buyer’s way of saying, “We’re interested, and here’s what we’re thinking.” Yes, before you know as much as you might like, you have to come up with some ideas for the structure of the purchase, the source of financing, and the price you are willing to pay. Typically, I would say this is the maximum price, because due diligence more likely will find risks causing the purchase price to decline than to find hidden treasures that will increase the value of the company and the purchase price. investopedia.com has a good summary, including a section on M&A for companies versus stock investing at
https://www.investopedia.com/terms/i/ioi.asp
The IOIs are reviewed by the seller and only a few are expected to be pursued. A teaser may be sent to hundreds to a few thousand organizations. Only a fraction of those will submit an IOI. Even fewer will take the next step and submit a letter of intent, possibly at the invitation of the seller.
5. Letter of Intent (LOI) (pronounced el oh eye)
Following negotiations over the IOI, both parties may sign a letter of intent (LOI). This document outlines the key terms of the deal, such as the purchase price, deal structure, and closing timeline. The LOI is a more formal expression of interest, but it’s still not a binding contract. From my perspective and experience, a key part of this document is an exclusivity clause that prevents the seller from shopping the business to anyone else for 30/60/90 days, maybe longer. That represents multiple risks to the seller such as information getting out, the business taking a hit in sales/earnings, key people leaving unexpectedly. DealRoom.net has some good information on the document, some samples, and a nice stair step chart of the steps in the process of buying a business at
https://dealroom.net/blog/business-acquisition-letter-of-intent
The next step is the hardest. For the buyer it’s like pulling teeth to get the information needed to make an informed decision and determine if the investment will provided a payback. For the seller, it’s like have your teeth pulled without the benefit of anesthesia. And it is super time consuming while you still need to run the business and prevent it from slowing down and decreasing the company value. That is partly why all trusted advisors recommend being ready for due diligence well in advance of putting a company up for sale.
Due Diligence Process
I have chosen to refer to this as a process rather than a document. For some buyers, they may outsource or delegate some part of the due diligence process and expect a report to come to a deciding body, such as the board of a family office, or the partners of a capital investment company. This process can take a few weeks in the best of cases, to months typically, to years in some cases, especially for companies that are larger or more critical to the defense industry. Before finalizing the next document, the purchase agreement, the buyer conducts due diligence – a deep dive into the business’s financial records, legal standing, and operational processes. This process helps the buyer identify any potential risks or issues.
DealRoom.net has an overview of the process and a downloadable checklist of its own (for the price of contact information) at
https://dealroom.net/faq/due-diligence-process
I have one list of 350 items a buyer may request, another with 60 items that I personally participated in completing. intralinks.com has made an extensive list available for the price of your contact information at
https://www.intralinks.com/resources/publications/essential-ma-checklist-get-your-next-deal-done
It has 250 items covering 12 areas:
- Corporate Matters
- Finance
- Operations
- Contracts
- Labor Relations
- Taxes
- Environmental Matters
- Regulatory & Legal Matters
- Litigation
- Intellectual Property
- Real and Personal Property
- Industry
Today, most “brokers” will have a digital data room for storing all this information. You will be surprised to find that you don’t have an up to date contract with your IT support people, or that your customer’s purchase order is not binding, or that you failed to pay the fees to keep your intellectual property trademarks in force. You may find you have to have a formal inspection of the property to be sure there are no buried tanks of liquid. Every one of these items is a risk to the value of your company and the purchase price the buyer is willing to pay. That’s why it is advised to “always be ready to sell.”
During this process, there will likely be one or more site visits by the buyer to the sellers location. They may contact customers and suppliers to get information. The seller will likely be obliged to make this happen. And it all needs to happen with the fewest people involved to avoid news leaking out. Best of luck. Many deals fail this step. If you are successful in getting past this hurdle, then comes the next document, the Purchase Agreement.
6. Purchase Agreement
Don’t trip now as you are close to the finish line. Yes, more deals fail to jump over this hurdle as well. The purchase agreement is the cornerstone of any M&A or buy/sell deal. This legally binding contract details all the agreed-upon terms of the sale, including the purchase price, payment methods, closing date, and any contingencies. It’s the culmination of all the preceding steps, putting everything in black and white. There will likely be several iterations as the parties and their broker and legal and accounting people look at the effects of the deal on people in the business today, future incentives for the seller and the employees, and taxes, taxes, taxes. All of these interactions will cost money on an hourly basis at the very least. Some will involve, as with the broker or M&A specialists, commissions that are substantial. Advice: pay attention to everything and have your team (you do have a team of trusted advisors don’t you) study it and put the effects into terms YOU, as the seller, can understand. Buyers often prefer to purchase the assets of a business rather than the stock. An asset purchase leaves any liabilities from those buried oil tanks and warranties for past defects with you, the seller. A term you will hear is Cash Free and Debt Free. Make sure you understand each aspect of how accounts payables, accounts receivables, loans, inventory, risk holdbacks, Representation and Warranty insurance or Tail insurance. Yikes, it can be a lot. Yet, I have participated in sales by a benevolent owner to an employee be completed with much less rigor (but more risk on both sides.) I have also seen a buyer have to “give back” a business to a seller, which neither wanted, because they could not fulfill the purchase agreement. You may find the lawdepot.com sample stock purchase contract and the eforms.com asset purchase agreement of help at
https://www.lawdepot.com/contracts/stock-purchase-contract/?loc=US
and
https://eforms.com/purchase-agreements/asset
7. Closing Documents
The finish line is close, no pun intended. More documents of a legal and financial condition to be executed and notarized. Cashiers checks and wiring of financials to be completed. Once all contingencies are met and due diligence is complete, the closing takes place. This involves signing the final purchase agreement and exchanging any necessary funds or assets. Additional closing documents may be required, depending on the specific deal.
Finally
That is pretty much the sum total of what I have learned in the last decade or more as I have helped businesses from fifty thousand to twenty-five million in purchase price. Want someone to coach you to get ready for this important race? Let’s talk https://calendly.com/paul-ba
