The Process
There is no shortage of prospective buyers willing to waste your time and money. But an efficient process should run its course between 60 and 120 days, broken down as follows:
Day 1-2 Confidentiality Agreement (CA) / Non-Disclosure Agreement (NDA)
- Before sharing sensitive information about your company, you should sign a confidentiality agreement with the prospective buyer.
- The agreement should protect the information you share from being shared with parties who have not obtained your permission or for competitive purposes.
Click here to see an example of our NDA
Day 3-9 Pre-Letter of Intent (LOI) Diligence
- Buyer will request high-level information, such as:
- 3-year summary financials (income statement, balance sheet, cash flow statement)
- Ownership table
- Top 3-5 competitors
- Competitive advantage
- Typical customer contract terms
- Data on repeat nature of the revenue (e.g., repeat purchases and customer churn)
- Seller should verify that the buyer has the financial capacity to buy the business by understanding where the funds will come from (both equity and debt)
Day 10-14 Finalize LOI
- Buyer and seller work together to agree on acquisition terms that are written down in a document called a Letter of Intent and signed by both parties. Terms will include:
- Type of sale (asset or stock sale)
- Price
- Sources and uses of funding (e.g., debt, equity, seller financing, rollover equity)
- Diligence timeline and milestones
- Exclusivity period (seller agrees not to market the business to any other buyers so the buyer has protection to spend time and money in working toward close)
Day 15-120 Due Diligence and Closing
- During due diligence ("diligence") a buyer is trying to verify that what the seller has told them about the company is true and discover what they need to know that they did not learn from the seller.
- Diligence is wear and tear. It's hard on both the buyer and the seller. With so much at stake, emotions run high and patience runs thin. It's a painful, messy, time-consuming and necessary process, and the buyer and seller often toggle back and forth between willing to do it and not willing to do it multiple times during the process.
- From a seller's perspective, having accurate, well-organized information and providing it to the buyer on a timely basis is the most important variable.
- From a buyer's perspective, identifying and then focusing on answering the few "deal-hinging" questions is the key variable.
- Days 15 to 60 should focus on:
- the buyer's review of the information provided by the seller
- the buyer's discovery of what they need to know beyond what the seller provided
- the buyer's decision on whether to begin spending money on third-party diligence
- Days 61-90 should focus on:
- verifying financial statement accuracy (done by a third-party accounting firm in a report called a "quality of earnings")
- legal diligence performed by attorneys (e.g., reviewing contracts with customers and vendors)
- market and technical diligence performed by specialized consultants (e.g., reviewing compliance with applicable laws, strength of software code)
- Days 91 - 120 should focus on:
- drafting, negotiating and signing the legal documents
- negotiating the hundreds of small decisions standard purchase agreements require
- Well prepared, skilled sellers and buyers can condense the diligence process into 60-90 days. Mistakes, delays, vacations, holidays, and complicated disagreements are usually part of this very human, emotional process. But in the end, buyer and seller can shake hands on a difficult job done well.