The small business sales process varies from deal to deal but will always share many common characteristics. Below, we’ll walk you through the stages of a deal and what you should expect from each.
The order of these steps may change slightly depending on a buyer’s exact preference. Others might not happen at all.
Step 1 – Owner’s call/meeting – Almost every small business sale process begins with a phone call or meeting between the owner and the prospective buyer. Your goal as the seller at this stage should be to learn about the buyer’s interest in your company and assess whether they might be a good partner for you to work with. Buyers will be making the same assessments of you; they’ll want to work with a reasonable owner that can help transition the business to new ownership and share important information about the business and industry. It is important that you and the buyer have a good rapport and share a common vision for the future of your company. Without some common ground here a transaction will likely just fall apart at a later stage.
Step 2 – NDA / Information share – Once initial fit has been assessed, the buyer will likely ask you to review your business’s financials. To get comfortable enough to do this you will likely want to sign an NDA (non-disclosure agreement). The NDA will restrict the buyer from sharing any of the information they receive with anyone not participating directly in the transaction. Most NDAs will not, however, restrict the buyer from sharing information that could have otherwise been obtained through non-proprietary means, such as industry information or general features of your business that might have been publicly available. It is important to remember that a buyer should not be asking for each and every document related to your business at this stage; that is something done during the diligence phase.
Step 3 – IOI / Site Visit – If the buyer has reviewed your financials and is still interested in learning more about your company they will likely want to meet you, your key employees (ideally), and take a tour of your business. Often, this step is preceded by an IOI, or an “Indication of Interest”. The IOI is a legal document used often by some firms and not at all by others – it’s really personal preference. The benefit of getting an IOI from a seller before a site visit is the IOI will indicate a price range and other terms that the seller would expect to agree to if a transaction occurs. This benefits you as a seller; you wouldn’t necessarily want to spend your day hosting a buyer that you aren’t on the same page with. The IOI will often also lay out the buyer’s financing sources (debt, equity, or a mix thereof) and their proposed initial transaction schedule. It is important to remember that an IOI, like an LOI (the next document we’ll see), is non-binding. Either you or the seller can exit the proposed transaction at any time, for any reason, unless the document explicitly states otherwise.
Step 4 – LOI – An LOI, or “Letter of intent” follows an IOI and is an escalation of commitment between you and the potential buyer. For most buyers, an LOI represents a real commitment to buy your business unless any unforeseen items arise in the diligence stage. Other parties, however, use LOIs similarly to IOIs; they’ll look to get a signed LOI on file quickly and enter diligence as fast as possible to assess fit. The LOI will outline the proposed terms of the transaction and any relevant timelines. It will also usually contain a clause regarding “exclusivity”, which will state that for a pre-determined period of time you will not shop the business to another buyer. This is a good-faith measure to ensure that both parties are committed to consummating the transaction if diligence goes smoothly – it is also typically the only binding portion of the LOI. Once an LOI is signed you are ready to move into the heavy-lifting stage of a transaction – diligence.
Step 5 – Diligence – Diligence is the most time-consuming step for both you and the buyer. As the seller, it is during this time you will be required to produce any and all documents relating to your business including tax returns, bank statements, insurance policies, employee records, and legal filings, and more. The leg-work in producing these documents can be overwhelming for many sellers and should be a serious consideration if you’re still unsure whether you’re committed to selling. For buyers, diligence is a time to dot i’s and cross t’s. Buyers have a vested interested in leaving no stone unturned to protect the capital they are putting at risk. Experienced and professional buyers like ValueStreet will produce an information request list early in the diligence process indicating exactly what will be required. This benefits you as a seller; the earlier you know what you’ll need to produce, the better you can plan for it. Diligence periods have set timelines and any delay in producing documents will likely result in a delay in closing and potentially the lost goodwill of the buyer.
Step 6 – Purchase Agreement – Purchase agreements are the definitive contracts in any business acquisition. The document will describe actually what is being sold, the terms under which the assets are being transferred, and what assurances each party is making to the other about the condition of those assets (called ‘reps & warranties’). Purchase agreements take time to produce and even more time to finalize. You should expect a few weeks of attorneys fees as your attorney passes the document back and forth between the buyer and theirs. Due to the stress levels involved at this stage, deals can fall apart over trivial details that wouldn’t matter if cooler heads prevailed. The good news is that if you’re at the purchase agreement stage you and the buyer have come down a long road together and are literally ready to sign on the dotted line. Doing so will lead to closing.
Step 7 – Closing – Closing is when assets are transferred and the buyer assumes ownership of your assets. The money you are owed – which until now had been in escrow – will be distributed to you, usually less some percentage held back to ensure all reps and warranties you agreed to are met. You are now free to assume whatever transition role you have negotiated with the buyer and the buyer will be busy getting comfortable operating you your business.