How The Exit Deal Is Done

by | March 5, 2012

When talking with business owners about exit planning, most of the big questions revolve around the buyer and the price.  These are the most obvious components but, as they say, the devil is in the details and the details often come out in the deal documents.    In this post, I’ll share a bit about the legal process in planning for and finalizing your exit from your business. 

Prepare the Company.   Long before you go after a buyer, you need to be sure your company is prepared for sale.  The preparation process includes firming up the company’s corporate records, financials, contracts and intellectual property.  Formalizing processes in the company and ensuring the company can operate independently of you are important steps in preparing the company for a buyer as well.  A valuation is also important at this stage to set your expectations properly and allow you time to build additional value in the company.  In taking these steps, you will be sure the prospective buyer sees an organized, well-run company that he or she can take to the next level.

Understand the Potential Buyers.  When considering potential buyers for your business, think about who would find the business valuable.  The list may include competitors, complementary businesses, employees, and family members.  For each person or party on the list, consider why they would find he business valuable – what specifically makes the business valuable to that person.  Knowing who the potential buyers are and what they find valuable in the business will help you to determine the most appropriate buyers, how to approach them, and the proactive steps you can take to build assets and value for them. 

Starting the Conversation.  Getting access to potential buyers can be a big challenge for many small businesses.  Business brokers, investment bankers, and private equity firms are all options for finding both strategic and financial buyers looking to grow the company.   Even with employees and family members, finding the right person and having the conversation is not always easy.   In addition, there’s the question of confidentiality – do you want the proposed sale to remain confidential and how to you ensure confidentiality is maintained?   Getting a non-disclosure agreement in place is an important step, regardless of who’s involved so you can confidently have conversations with prospective buyers.

The Deal Documents.  The terms of the proposed transaction can take many paths and may be heavily negotiated.  The process usually starts with a Term Sheet or Letter of Intent where the buyer proposes some basic terms for negotiation.  From there, the terms are negotiated and the Term Sheet signed.  These documents are typically non-binding but allow the parties to share more information with the agreement that they plan to move forward toward a deal.   Following the signing of the Term Sheet, the parties participate in “due diligence” where they request documents and information about the company.   The preparation you’ve done previously will help immensely in making this a smooth process that raises very few red flags for the buyer.    The transaction may also include some contingencies to closing such as the buyer obtaining financing or the assumption of a lease or securing a key employee.  These conditions to closing will be included in the Purchase & Sale Agreement.  This Agreement documents the final deal terms including purchase price, payment terms, contingencies, warranties of each party, liability protections, and termination provisions.   The Purchase & Sale Agreement may be signed in advance of the closing or at the time of the closing, depending on the timing of the transaction and any contingencies.   The closing is the event where ownership transfers.  At the closing, the parties agree that all contingencies have been satisfied and they reiterate the continued accuracy of representations and warranties. 

Transition.   The seller may not be included in the transition beyond communicating the transfer to the employees.  However, in many cases, the seller remains on board to assist during a transition period, helping the buyer meet customers, vendors and employees to ensure the company continues successfully. 

These steps are universal in business transactions.  Planning in advance for your exit will enable you to make the process smooth for you, the buyer and all the other stakeholders of your business.