7 Steps To Negotiate The Sale Of Your Company
Someone just called you and wants to talk about buying your company. What do you do now?
Selling your company is a big undertaking with lots of steps involved. Whether you are actively engaged in trying to make this happen, or if you received an unexpected inquiry to buy your company, before you start down this path you need to understand what is going on, what could happen, and most importantly what are the intentions of the other party.
My law firm gets requests all the time for template (meaning “free”) non-disclosure agreements and the first thing I ask is why they want this document. When the answer is that they are starting negotiations to sell their company and the prospective buyer wants to see their books I say, “Whoa!” Do NOT merely get a signature on some template NDA and hand over your books! Take a deep breath, re-read the preparations you made for this scenario (you did prepare for this, right?) and proceed with a firm plan.
1. Judge The True Intentions Of The “Buyer”
Let’s face it, there are scam artists out there, and there are companies that are hired just to learn as much about their competitors (YOU!) as they can. Even if a broker brought this potential buyer to you, you need to determine whether this buyer-contact is serious. First, have a face to face conversation with the business making the request for an NDA. Not a phone call, not a Zoom meeting. A sit down where you can see each other. (Okay this might not be possible if the buyer is overseas, but I am sure you know how incredibly rare that is.) Arrange the meeting at a neutral location, and if you are not in the same city, find a city you both will have to travel to. Merely asking for this will weed out a lot of supposed “buyer.” But let’s assume they are serious, what next? You don’t need a non-disclosure agreement to have this meeting.
Have your questions ready and make sure all of them are answered, things like: Why are they interested in your company of all the ones in your industry; does the buyer have experience in your industry; how do they expect to value your company; do they need or want you or your employees to stay on; etc. You will have a lot of questions, and you want answers, but you also want to judge how the interaction with the buyer goes. In all likelihood you will have to work with this person (or team of persons) for quite a while, maybe for years, after you sell.
At this initial meeting, you should be open and frank as you want to be, because the buyer is judging whether they can work with you too. But the buyer may press you for details about your company that you are not comfortable disclosing yet. Just tell them that will come after you both sign a letter of intent. One of the first things you need to know is whether the buyer is buying your company’s assets, or your equity interests in the your company, or are they merging your company into an existing or new company. A merger is different from a sale of the equity or assets; in a merger you will take equity in the buying company. Make sure you understand these terms and what each possible path means for you and your company going forward.
Did you like what you heard, and is the prospective buyer still interested? Then the next step is that NDA, but wrapped in more details.
2. Start with a Letter of Intent
A letter of intent, or LOI, is an agreement to the major terms of a deal. It will contain its own binding non-disclosure clause that is specifically tailored to this kind of deal, and it will contain a binding “no-shop” or “standstill” provision that keeps you from negotiating with other prospective buyers while you try to iron out this deal. You will be “off the market” while this is happening, so you see how important it is that you understand the seriousness of this prospective buyer. Aside from those provisions, the LOI will be non-binding (you can change your mind at any time) and it can be as broad or as specific as you want it to be. For example, it could have a fixed price for the transaction, or it could have a formula for how your company would be valued, or the price term could be merely TBD. But keep in mind that the less specific the LOI is, the more work you will have to do during the negotiations over a binding purchase agreement. So it is best to get into details that are important to you, because If you cannot agree on the high level things at this stage you should not go forward. Don’t postpone confrontation with major issues.
If you both sign the LOI, then you’ve officially engaged in the process of selling your company!
3. Due Diligence
During due diligence, the Buyer wants to learn everything about your company. It is a very invasive scrutiny, and sellers sometimes use this time merely to try to manage the buyer’s scrutiny. But you should not merely wait for the buyer’s due diligence. You should perform your own due diligence investigations on them! When my law firm is brought in to help after the LOI is signed, we almost never see provisions in the LOI to allow for this, but it is crucial that you learn as much as possible about your buyer as you can, or you might regret the sale almost immediately after the purchase money is deposited in your bank. Unless this is an all-cash-walk-away-and-forget-it deal for you, you’re entering into a partnership with the buyer for a while.
What is the history of the buyer’s business. What reputation does the buyer (and his other businesses) have in your industry or in any other industry? The buyer surely wants to know if there have been any lawsuits against your company, and you need to find out the same thing about him. Look at his debt (ask the buyer about it and find UCC financing statements filed in the states where his companies are located). Check in with his management team.
4. Your Lease
During due diligence, the buyer will be trying to re-negotiate your commercial lease with your landlord. Most likely when you dust off that lease to read it you’ll discover that this will trigger some extra costs you will have to pay to your landlord. Oh, did you think about that when you prepared the LOI? Maybe that LOI should have mentioned that the buyer would share those costs with you. If your lease is particularly egregious this inquiry might even trigger an attempt by your landlord to terminate your lease. Please make sure you completely understand your lease before you get to this point in the selling process.
5. Negotiating the Definitive Agreement
During due diligence you will also be negotiating the full details of the purchase-sale agreement or asset purchase agreement (PSA or APA). This can take a lot of interaction between you and your close advisors (your attorney, CPA, broker (if you used one) and family members). Your attorney and CPA will force you to think through all kinds of contingencies you probably never thought of before. If you will be working for the buyer after the sale there will have to be an employment agreement for you to spell out the minimum time you must stay on plus other terms (like a non-competition period). Will there be deferred payout of part of the sale price? Will you be forced to take some equity interest in the buying company? You will have to make many promises about your company and its history—are all of your employees legal; any lawsuits pending; have you paid your taxes; is your intellectual property secure? This time is the most arduous part of the sale, and sometimes you will feel like it’s not worth the effort. But stick with it and use your advisors as counselors. We’ve seen these deals before and we know what you are going through.
This final step is usually done virtually with everyone using an e-sign software. You should have arranged to get your payment by wire transfer directly into your bank account.
7. Enjoy What You Have Accomplished
Building a company that someone else will pay handsomely to buy from you is a long and lonely process. And you may find that you are emotional about seeing your “baby” taken by a stranger, particularly if this is your first company sale. But you should be proud of getting to this point, it’s a major accomplishment! Earmark a little of the payout money to take a nice vacation. Relax. Pamper yourself. For a short time. Then get back on the saddle and start another venture!
Entrepreneurs are the true heroes of society. Argent Place Law salutes you! We are a team of entrepreneur-lawyers serving Entrepreneurs just like you. Think how great it will be to have a legal team with entrepreneurial experience on your speed dial so you can call us up and say, “I’m starting negotiations to sell my company! What should I do first?” Contact Argent Place Law to find out: 703-539-2518.