Below are a few thoughts to help you prepare your client for what to expect from the deal process.
Workload: The workload for many clients can be intense. Especially for clients that are going through a deal for the first time, it can feel like working a second job through much or all of the deal process. Underestimating the work involved can leave clients unprepared to create the most out of their deal process.
Mental and Emotional Load: Beyond the physical demands, many deals carry a great deal of mental and emotional work for clients, especially first-time buyers and first-time sellers. Deals involving family relationships, or deals where a seller, in particular, has a strong emotional attachment to the transaction can carry a particularly heavy emotional load for some clients. Understanding the other party’s workload and mental and emotional load can help a client understand how to better manage the deal process.
Overview of the Deal Process:
Every deal process is different, but most generally follow a similar pattern through the phases below. Most of these phases overlap at least in part. Once the General phases below begin, most deals take anywhere from 2-6 months or longer to complete, depending upon all of the moving pieces involved.
- Seller-Centric:
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- Seller Preparation: For sellers that have decided to take an intentional approach to the sale process, the work of getting their financials cleaned up, increasing sales, optimizing EBITDA or revenue, and maximizing the value of the business to a buyer usually begins long before the rest of the deal process. This process can begin years in advance, and can have a significant impact on valuation.
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- Identifying Potential Buyers: When the seller is ready to begin the sales process, it may start shopping the business directly to buyers, or engage a broker or investment banker to identify buyers and seek a competitive bidding process. The investment banker or broker will often prepare some form of marketing material or confidential information memorandum to help inform potential buyers about the business. This phase can take several months to a year or more.
- Buyer-Centric:
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- Search Process or Strategic Acquisition: Sometimes, the process will begin with a buyer engaged in a search process identifying a target business (that may or may not have begun preparations for sale). It may also start with a strategic buyer identifying ideal targets for purchase. This phase could take several months to a year or more.
- General Phases:
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- Due Diligence: Usually, before the parties have an initial agreement of on key terms, the seller will have the buyer sign an NDA or Confidentiality Agreement and provide the buyer with some initial due diligence information to evaluate the business.
Due Diligence documents are usually shared through a virtual data room prepared by the seller’s team. In a competitive sales process, there will often be several potential buyers with access to the data room at the same time. Due diligence will often include some form of formal or informal “Quality of Earnings” to evaluate the seller’s financial performance. Due diligence often lasts throughout much of the deal process, but most is usually completed earlier in the deal process.
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- Initial Negotiations: Initial deal term negotiations help determine whether the parties are close enough to a deal to continue discussions and due diligence. Sometimes this phase will conclude with the parties signing an Indication of Interest (an “IOI”), or Letter of Intent (an “LOI”). This phase can take anywhere from a few weeks to a few months.
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- Buyer Financing: If a buyer is obtaining financing, that process will usually begin before or during the early part of the deal process, and generally will be completed shortly before or at the same time as the closing on the deal.
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- Documentation: Additional negotiations and deal documentation is where all of the rest of the process really goes to work to put the deal on paper. Some deals have only a few documents, and others can have dozens of complex documents by the time it is all said and done. This process usually takes at least a month, and can take up to a few months.
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- Closing: Once the documents are signed and the parties (and usually the bank and some third parties) are ready for closing to occur, the closing will occur. Some deals will have documents signed before closing with a delayed period in between for additional due diligence and satisfying closing conditions, and some deals will close simultaneously with signing the documents.
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- Post-Closing/Transition: Now the real work begins! Once the deal has closed, the process of transitioning the business to the buyer begins in earnest. Often there is a transition period for the seller or the owners of the seller to provide transition services to help make sure that things like relationships and know-how are successfully transitioned to the buyer.
If net working capital was part of the transaction, there will usually be a true-up within about 60 days after the closing. Some deals include some form of hold back, earn out, or escrow that will be paid to one of the parties within a few months up to a few years after closing. The post-closing obligations of the parties can take anywhere from a few months to a few years to fully complete.
Discover more M&A resources including a pre-deal checklist.
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