Tying the Knot

Welcome to Phase III of the selling process: the closing – a.k.a., the fun part. You’ve done your research, identified your targets and just maybe met your match. You’re almost ready to say, “I do.” But first, let’s backtrack. (We know, the suspense is killing you.)

After you’ve (1) narrowed down your potential buyers; (2) received preliminary “indications of interest,” or IOIs; and (3) conducted company visits, you’ll ask for term sheets from the buyers who are still in the running.

A term sheet outlines the specific conditions of a potential transaction, which will become binding in the final Asset Purchase Agreement. In most cases, the term sheet will:

  • Give the specific purchase price, as well as the payment terms. The seller usually will be paid through stock, cash, earn-outs or seller notes (or a combination of those).

  • Address indemnification, escrows, non-compete issues and working capital considerations.

  • Define the period of exclusivity. This ensures the seller won’t talk to other buyers for a certain number of days – typically 45 to 60.

Once you’ve selected a term sheet and said so-long to the other contenders, it’s time for due diligence. This is when the buyer does his homework and makes sure he’s getting what he’s paying for. Assuming you took our Phase I advice (and you’ve retained an experienced investment banking firm to guide you along the way), there shouldn’t be any surprises.  At this point, your job is to supply the buyer with the documents and information he needs. It’s smart to engage legal counsel if you haven’t already, preferably someone with solid M&A experience.

Due diligence has three facets: financial, operational and legal. Depending on the size of the company, buyers may hire an accounting firm to help with financial due diligence. Among other things, they’ll review your numbers, conduct an inventory valuation and confirm that you’ve followed proper accounting procedures. As for operations, the buyer will dispatch a member of his team (or hire a consultant) to thoroughly inspect your equipment and facilities and survey the property. Meanwhile, legal counsel will examine your company’s legal documents, contracts, liens, articles of incorporation, etc., and they’ll verify that what you’re selling can, in fact, be sold.

If all goes well during due diligence, the conditions outlined in the term sheet will be expanded upon and finalized in the Asset Purchase Agreement. Then, all you’ll need is your John Hancock to complete the transaction, seal the deal and tie the knot.