Step-by-Step Process for Buying a Business

Step 1: Initial meeting of the buyer and the seller

Buyers and sellers are typically introduced to each other by bankers, brokers or other financial intermediaries — if they do not meet naturally through business contacts. 

They then have an initial conversation to decide whether the purchase is worth discussing seriously.

Step 2: Determine if the seller is "in a process"

If you, the buyer, decide to pursue the purchase after this initial conversation, you should find out if the seller is involved in a formal sale process. 

If this is the case, the seller's banker will have created a schedule for conducting the sale which will be laid out in a "process letter". You will have to follow this schedule and comply with its requirements. If the seller is not "in a process", you can go ahead and submit an unsolicited or preemptive bid. 

Keep in mind that the management or board of the seller may solicit other offers even if they like your bid to meet their fiduciary requirements.

Step 3: Sign Non-Disclosure Agreements (NDAs) and start preliminary due diligence

Once you and the seller have decided to pursue the transaction further, you will typically need to sign an NDA and start preliminary due diligence. 

Preliminary due diligence quickly investigates the major assets and liabilities of the seller and identifies the principal risks that are involved. If the seller is in a process, the process letter will usually contain a schedule for completing this process.

Step 4: Create a working group 

Buying a business is a complex and tedious coordination exercise. 

To ensure the smooth flow of information, it is important to create a list of key people involved in the deal along with their contact information. Keeping everyone in the loop also helps us to avoid last-minute surprises and effectively assign responsibilities.
This list should include senior management of the buyer and seller, lawyers and other experts as well as external parties like banks and brokers. 

Step 4: Execute Letters of Intent (LOIs)

Once the preliminary due diligence is complete, the buyer prepares a "Letter of Intent" or LOI, also called a Memorandum of Understanding (MoU).

This LOI is a non-binding agreement outlining the key terms, assumptions, and conditions for a transaction such as the proposed purchase price, payment structure, and closing date. 

It is important to keep in mind that LOIs often include a period of exclusivity, during which the seller may not entertain other offers. While LOIs are generally non-binding, there is typically an exception for its confidentiality and no-shop provisions which are binding. 

If the terms of the LOI are not agreeable to either party, they may choose to walk away from the deal without penalty.

Step 5: Conduct due diligence

The due diligence process typically begins with the buyer's lawyer sending the seller a due diligence request list specifying documents to turn over, information to provide and questions to answer. 

All of this information is stored in a shared folder on the cloud called the 'data room'.  Before modern computing, these documents were actually placed in a physical data room where the lawyers poured over their contents. 

The buyer's lawyers then look through these documents to confirm that the assumptions underpinning the sale and the representations made by the seller are true. They also look for red flags and evidence of existing or future legal problems involving the company or assets being purchased. 

The buyer's internal departments, sometimes with the help of external consultants, carry out the business due diligence. This consists of looking at the sales, marketing, human resources, finances etc. to confirm that reality matches the seller's representations and the buyer's assumptions. 

Note: If the seller is in a formal sale process and there are many potential buyers, the seller's banker may only provide access to the data room to a selected number of buyers who make the best offers in their LOIs.

Step 6: Determine Financing Requirements

Find out how much money is needed to buy the business and on what time schedule. 

Based on this, determine what your lenders' due diligence requirements are for the business or assets being acquired and bake those requirements into your due diligence process. If the loan agreement needs certain representations or warranties, ensure that they are included in the due diligence process and list of documents requested from the seller.

Step 7: Identify what consents or approvals are required

Buying a business requires consents and approvals from a large number of people and entities. This can include banks, regulators, shareholders etc. 

A list of all the necessary consents and approvals for the transaction should be compiled to ensure that all these approvals are received in time for the closing. This can include ensuring shareholder and board resolutions are passed and conditions of loan agreements and side letters are satisfied. 

This process is more complicated in asset purchases because of the consents and approvals involved with transferring property, employment contracts etc.

Once a list of required consents and approvals is compiled, the buyer and seller need to work together to ensure that this work is done on time according to a pre-agreed schedule.

Step 8: Identify and address the major risks

Use the information unearthed during the due diligence process to identify serious risks. 

This could be physical damage to the assets or legal disputes regarding their ownership in the case of asset purchases. Or the risk may be potential liability from lawsuits in the case of takeovers or mergers. 

Key shareholders may not have clear title to their shares. The shares may be pledged to a third party or be involved in divorce or bankruptcy proceeding. You may need to find ways to resolve these problems. 

After identifying key risks, assign members of the working group to address these risks within reasonable deadlines.

Step 9: Negotiate and draft the Acquisition Agreement

The acquisition agreement takes the form of a asset purchase agreement, stock purchase agreement or plan and agreement of merger depending on the transaction. 

It is usually drafted by the buyer's lawyer who starts drafting it when the due diligence process is ongoing. However, if the seller is in a process or is conducting an auction, then the acquisition agreement is provided by the seller's banker. 

The negotiation and bidding, in such cases, happens with the prospective buyers making offers in connection with the sale price and proposing specific changes to the terms of the acquisition agreement. 

Step 10: Close the acquisition and complete the post-closing process

What exactly is the closing of a business acquisition? 

'Closing' refers to the final stage of the transaction when ownership of the business is officially transferred from the seller to the buyer. It is not refer to the day when the acquisition agreement is signed. Instead, the closing date is typically a few days later when the agreement actually takes effect. 

During this interval, the buyer and the seller fulfil the 'closing conditions'. These can include obtaining final approvals and fulfilling legal or financial requirements. In an asset purchase, the seller transfers the assets, operations, licenses etc. that are part of the deal and the buyer takes possession of them. In all cases, the buyer uses this time to transfer the agreed upon price for the business to the seller. 

To ensure all this happens smoothly, a closing checklist should be prepared in advance and responsibilities should be delegated to members of the working group. 

The lawyers should closely monitor developments and coordinate matters.