by Dave Driscoll
Time is not necessarily a friend when it comes to mergers and acquisitions (M&A) transactions. When a prospect decides to actively investigate buying a business, all parties and advisors should commit to a deliberate pace to move the process forward. The M&A advisor, prospective buyer, and seller all need to focus on reaching critical decision points that either progress toward a purchase or determine the deal won’t happen.
Buying a business is a time-consuming process even under the best circumstances. When a prospect identifies an interesting opportunity, a non-disclosure (confidentiality) agreement must be signed and the financial ability to consummate a transaction must be assessed. After clearing those hurdles, a Confidential Business Profile of the business is shared with the prospect.
Assuming the buyer prospect likes what they see, the next step is a conversation with the business broker to answer additional questions and provide more information to assist with the decision to proceed.
If the buyer confirms continued interest, and the broker believes the prospect and seller could realistically reach agreement, the business broker should coordinate an offsite meeting to introduce the seller and prospective buyer. This is an opportunity to engage in a general conversation about the business and gauge chemistry between the buyer and seller.
As you can see, quite a bit of time can pass before an introduction with the owner. Reaching that step in a timely manner will not occur if either the broker or seller fails to do their part to manage the process, or the buyer prospect approaches the process casually. Even coordinating busy schedules and a location to introduce the seller and buyer can take several weeks.
After the meeting, both the buyer and seller must determine whether they want to proceed toward a sale. Yes, the seller may decide (for a variety of reasons) that they do not want to sell the business to a specific candidate. In most cases, the seller wants to feel confident the business will continue to succeed, provide for their employees, and satisfy their customers. Therefore, a seller will be judging the buyer on perceived ability to successfully lead the company.
If the parties mutually agree to continue, drafting a Letter of Intent (LOI) is next. The LOI is the formal written record of the business terms and conditions of the deal as discussed between the buyer and seller during the investigation process. The LOI is non-binding but is negotiated to capture “the essence of the deal.” The broker facilitates the LOI negotiations. Several drafts typically pass back and forth before all parties reach agreement either to proceed to due diligence or to abandon the deal because of an impasse.
The lengthy process described to this point assumes both the buyer and seller are engaged, motivated, and willing, and can take four-to-eight weeks. Now, imagine if either party is not proactive, or the M&A intermediary is not engaged and diplomatically conveying the urgency of next steps to both sides.
When the LOI is accepted and signed by the buyer and seller, due diligence begins. The length of due diligence is defined in the LOI and is generally 30-60 days, plus an allowance for extensions based on certain circumstances.
If the buyer remains committed to the deal, transaction attorneys begin drafting the Asset Purchase Agreement (APA) during the due-diligence period. The APA is the legal contract that describes the terms of the sale, including representations and warranties.
One major condition to closing a deal is determining how the purchase amount will be paid. If the buyer needs bank financing, a “commitment to lend” letter is required during the due- diligence period. Once the buyer has secured financing, processing that loan can take 30-60 days, depending on the type of funding. SBA processing frequently takes 60 days.
Once the due-diligence period is completed, the APA is fully negotiated, financing is secured, and all the necessary documentation is completed to lend, then the closing is scheduled. Typically, closing can occur within a week after all ducks are in a row.
The transaction process from start to closing can take three-to-four months or even longer. That’s a long time for the seller, buyer and broker intermediaries to stay focused and keep the process moving efficiently. Any diversion or distraction along the way can slow the process and fatigue all the parties.
Dave Driscoll is president of Metro Business Advisors, a business brokerage, valuation and exit planning firm helping owners of companies with revenue up to $20 million sell their most valuable asset. Reach Dave at DDriscoll@MetroBusinessAdvisors.com or 314-303-5600. For more information, visit www.MetroBusinessAdvisors.com.