When selling a business the owner will be inundated with multiple tasks. Working through due diligence, managing employee questions, and still running the business are only but a few balls the owner will be juggling. It is critical that an owner prepare for a sale well in advance of entering the market. Part of the preparation should be to develop an understanding of some of the documents they are sure to encounter. Below we look at five documents that every seller should know before selling a business.
If you enlist the services of an investment banker as your sell side advisor then you need to understand what the engagement letter will encompass. Think of the engagement letter as a statement of work between the business owner and the banker. The letter should outline the scope of the relationship and, if done correctly, should align the interests of the seller and the banker.
The following are some key components of the engagement letter that deserve extra attention.
Arguably one of the most important documents in the sale process is one of the first created. Once the engagement letter is in place the investment banker will begin drafting a teaser. This document will be sent to potential buyers and does not contain any company identifiable information (it is “blind”). This document is critical because it will sum up the investment opportunity in one page and may be the only piece of information a potential buyer will see. The objective is to get the prospect interested enough to move forward in the process.
Besides enticing buyers, the teaser also serves as a filter. A well-constructed teaser will attract the right buyers and filter out those parties that wouldn’t be a match. This saves both the prospect and the seller valuable time.
A professionally drafted teaser will:
– Provide prospects with a clear understanding of the business (the industry, how revenues are generated, the management team, high-level financial overview)
– State the goals of the transaction (100% sale, partial sale, owner transition)
– Be blind and not disclose any information that could be used to identify the company
– be honest, concise, and professional. Honesty is always the best policy in business and buyers will sooner or later discover false statements
Many business owners will be familiar with the Non-Disclosure Agreement (“NDA”). The purpose of an NDA is put in place to require confidentiality among the parties. During due diligence many confidential documents will be shared. As the seller, you want to be comfortable that the potential buyer won’t take a look at your secret sauce and go try to copy it elsewhere.
As with any legal agreement you want to include language describing the term, termination, defining what constitutes confidential information, and what happens with information once the agreement ends.
Once the NDA is signed the seller will be sharing the confidential information memorandum (“CIM”) with the buyer. The CIM will contain detailed information on the company and will serve as a jumping off point for buyers to get more familiar with the company. After reviewing the CIM buyers will make one of many go/no-go decisions.
After reviewing the CIM and having calls or even visits with management the buyer will present the seller with a Letter of Intent (“LOI”). Some LOI’s may be preceded by an Indication of Interest (“IOI”) which would be less formal. Depending on the situation the IOI may or may not be issued to the seller.
The LOI will contain the prospective buyer’s deal structure and terms. Once the LOI stage is reached the seller can be fairly confident that the buyer is serious, though nothing is ever guaranteed. The details contained in the LOI can vary by deal and by the parties involved. At a minimum the deal structure, consideration, desired close date, conditions to close, and due diligence requirements should be included. It is wise to get any hard requirements on the table before signing the LOI. Both parties should know what the other expects and no major surprises should come up as the purchase agreement is being drafted.
Once the LOI is executed it is time for the seller to bring their attorney and tax consultant into the mix.
While the LOI may not be binding the purchase agreement is and should be drafted with the help of an experienced M&A attorney. The agreement will contain the details of the LOI and any other terms that have been mutually agreed upon. The following are some of the common sections found in purchase agreements. Depending on your deal these may change.
The sell-side process can be long and tedious. Prior to entering what is typically a marathon and not a sprint, sellers need to be sure they are well versed in the documents they will encounter. An M&A advisor can provide a great deal of value but being educated and knowing what to expect is always a good decision.