By Rajnish Puri |
Part three of a four-part series.
In this four-part series on the subject of selling your business, I plan to share with you, based on my experiences, the various stages an owner of a privately-owned business can expect to go through when considering an exit strategy.
After a willing seller of a business and an interested buyer have executed the Letter of Intent (LOI) (please see: part two of series here), the real work to complete the purchase and sale of the target business gets underway. Teams of advisors, for both sides, go to work simultaneously, on their way to accomplishing their respective goals tied to a common end-result. In theory, transactions of this type can be signed first and closed at a later date after the completion or, in some cases, the waiver, of the requisite closing conditions. Practically speaking, however, a significant number of transactions involving privately-owned businesses are completed adopting the simultaneous sign and close mechanism. In other words, the parties sign the definitive agreement and close the transaction at the same time. For purposes of this conversation, we assume a simultaneous sign and close scenario. The time period between executing the LOI and closing a transaction involves the following primary activities, all taking place concurrently.
Preparing and Negotiating the Definitive Agreement. With some of buyer’s investigation of the target business conducted prior to the LOI stage and the principal terms of the deal enumerated in the LOI, generally, soon after the signing of the LOI, buyer’s counsel commences preparation of the definitive asset purchase agreement or stock purchase agreement based on the agreed-upon structure of the transaction. This is also the stage when representatives of buyer and seller are introduced to each other and establish the framework of communications, timing and expectations for completing the deal. When working on preparing the initial draft, buyer’s counsel is in regular communication with its client and team of advisors to build the essential provisions of the definitive document. Depending on the size and complexity of the transaction, this exercise usually takes a few weeks before buyer’s counsel presents the first draft of the definitive agreement to seller’s counsel. The negotiations begin soon thereafter, with seller’s counsel leading the effort on behalf of seller’s team. Simultaneously, seller’s counsel actively engages seller personnel most familiar with the target business to begin preparing the disclosures and other schedules to the definitive agreement, a process that continues through the finalization of the transaction documents. Although most of the attention is devoted to negotiating the definitive agreement, preparation of the ancillary documents also gets underway once both parties have reached a consensus on the primary structure of the former.
Due Diligence and Coordination with Third Parties. Due diligence investigation of the target business is an exercise that rarely stops until the closing. In fact, this aspect of the transaction only gains momentum with time, and justifiably so. If not done during the pre-LOI phase, secure virtual data rooms are established at this stage where seller continues to add pertinent information about the business giving access to both buyer and seller teams of advisors. While non-legal advisors pore over the analytics of the business data, counsel, specifically buyer’s, typically examines the information to formulate provisions in the definitive agreement. Seller’s counsel utilizes the data room information and communications with seller principals to prepare the disclosure schedules and determine the third party approvals required as a condition to closing. As the parties are targeting a simultaneous sign and close, the task of communicating with third parties – most notably landlords (where real property leases are part of the business being sold) and parties to significant contracts in the business – becomes both critical and sensitive, requiring the parties to strike a delicate balance. The transaction might not close – therefore, the need for obtaining contingent and confidential approvals from third parties. The transaction needs to close – therefore, the need for a timely approval. Some of the other principal communications involve tracking down the selling shareholders (especially where the ownership is broadly held), arranging calls between buyer and key relationships of target business, and addressing human resource issues to ensure a smooth transition for employees (if applicable).
Continuity of Business Operations. While all the activity surrounding the sale and purchase is ongoing, someone from seller’s team must continue to mind the store. Readers may recall from an earlier discussion in this series that, but for a select few provisions, LOIs are mostly non-binding in nature. As a result, there is no legally binding agreement between a buyer and seller to do the deal unless the parties execute a definitive agreement. Accordingly, the parties could spend an enormous amount of time and resources negotiating the transaction and yet end up walking away from the deal. (Note: Discussing the consequences of walking away is outside the scope of this conversation.) Some of the reasons for terminating negotiations could be outside the control of the parties, such as a sudden shift in market conditions, failure to obtain adequate financing or the inability to overcome regulatory hurdles. Many of the circumstances, however, can be managed, and ensuring that the target business remains strong or consistent with its past performance is a priority. A typical transaction cycle may last three to six months from start to finish, which could be an eternity from seller’s vantage point given the distractions caused by the negotiation process. Despite all precautionary measures, the word somehow gets out that the target business is in play leading to conversations among employees and others concerning their future, which, in turn, could impact performance. Buyer bids for the target business based on certain assumptions that include attaining baseline financial metrics. If those assumptions fail to reach the expected levels or new conditions suggest their imminent decline, buyer might renegotiate the price or decide to take a pass. Naturally, not a desirable outcome by either party and certainly not for seller who may watch its goal of selling the business drifting away – at least for some time. Hence, the point person appointed by seller at the early stages of the process should ensure the preservation and consistent performance of the business.
Closing and Transition. Somewhere along the line in the negotiation process, and typically after the two sides believe they have a well developed draft of the definitive agreement (even if not final), a closing date is penciled in. Even though it is a date that is only tentative at this point, in my experience, both seller and buyer take it very seriously and both teams work diligently toward meeting the target date. It is not uncommon, especially in document-intensive transactions, for parties to stage a pre-closing, a day or two prior to the actual closing date, to ensure everyone is on the same page and that all pre-closing conditions have been, or will be by the closing date, completed. Finally, following months of laboring through the process of conducting due diligence, negotiating deal documents, communications among seller, buyer and the employee contingent that remains with the target business, among other activities, the closing date arrives and the purchase and sale of the business is completed. Interestingly, in contrast to the flurry of activity taking place leading up to the closing date, the actual closing process is relatively short and less intense (other than the typical anxiety associated with accomplishing a significant task). The parties exchange signed pages of the transaction documents, buyer remits the purchase price and, occasionally, there is a press release or a limited announcement often conducted jointly by the parties. At that moment, buyer officially takes over the ownership and operations of the target business and, sometimes by express agreement and occasionally without one, certain designated personnel from seller management assist buyer with the transition to ensure the transfer goes through with minimal interruption.
In Part One and Part Two of this series, I shared thoughts on First Steps and the Purpose of a Letter of Intent, respectively. In Part Four of this series, I plan to give to our readers an overview of the primary components of a definitive agreement. Stay tuned for another conversation on ClarkTalk!!
Thank you for joining us on ClarkTalk! We look forward to seeing you again on this forum. Please note that the views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog. You should certainly consult legal counsel of your choice when considering the sale or purchase of a business. If you wish to consult with the author of this post or another attorney at Clark & Trevithick, please contact Raj Puri by email at firstname.lastname@example.org or telephonically by calling the author at (213) 341-1322.