10 Critical Steps for Selling a Complex Business By: Kaiser Wahab and Lauren Mack


1. Find Competent Legal Counsel

Mergers and acquisitions is a very specialized legal area. If the counsel you have been using for you business’ matters up to this point is inexperienced in this area of the law, it may be wise to interview other lawyers or firms that do have experience. An attorney who specializes in mergers and acquisitions is less likely to miss an important consideration in the final deal and will help you move towards a smooth closing. Make sure that you have a good relationship with your new legal team and ask for an estimation of how much the legal fees will be to complete the transaction.

2. Get An Investment Banker

Unless you have already received an offer for your business, you will need an investment banker to help you find a buyer. A good way to find a top-notch investment banker is to ask your legal and accounting advisors if they can recommend someone whose work has impressed them.  Personally interview the investment bankers you are considering and don’t be afraid to contact the heads of other companies they have worked with to inquire about their performances. Once your investment banker has furnished you with a proposed engagement letter, have your legal counsel thoroughly review it. Be on the lookout for “tail” provisions, which require you to pay the investment banker a fee if a buyer he or she introduced you to later decides to buy your company within a certain period of time.

3. Facilitate Due Diligence

A potential buyer will provide you with a due diligence list of all of the information they want to review before purchasing your company. This includes all of your company’s contracts, corporate records, personnel records, and (preferably audited) financial information. Make sure that open issues are resolved as soon as possible and have your legal counsel review your books and records.

4. Use a Nondisclosure Agreement

Before engaging in any detailed discussions with potential buyers, it is a good idea to have them sign nondisclosure agreements. The nondisclosure agreement should require the potential buyer to keep all of your company’s non-public information confidential for a certain number of years and to return all confidential information if the deal falls through. Nonpublic information may include unpublished patent applications, trade secrets, financial information, customer lists, and business strategies. A provision may further provide that the potential buyer may not solicit any of your employees for one or two years after the agreement is signed in order to protect your key employees from being poached using information obtained during purchasing talks, such as employee salaries and bonuses.

5. Negotiate a Letter of Intent

A letter of intent outlines all of the major terms of a proposed transaction. It is mostly nonbinding, as the purpose is to allow the parties to easily see what deal points they agree on and whether there are any major areas of disagreement yet to be worked out. The letter of intent will also aid the drafting lawyers in preparing the necessary legal documents.

There are typically three provisions that do bind the parties included in the letter of intent. The first is a clause representing that neither party has engaged any broker or dealer and indemnifying the other party for any claims that may arise from dealing with a broker or dealer. The second establishes that both parties will pay their own expenses arising from the transaction. The final binding provision is often a “no shop” clause included by the buyer. This provision keeps the seller from discussing or negotiating a sale of the company with any other party for a period of one to two months while the buyer performs its due diligence and closes the transaction. This prohibition should be taken very seriously, and you must inform any other buyers who approach you during this time that you are legally constrained from talking to them.

6. Determine If an Earnout Is For You

An earnout is when a portion of the purchase price is paid at closing and the rest is paid later based on the future performance of the company. Earnouts often lead to disputes over whether it was properly earned or whether the buyer failed to provide the resources needed to meet the earnout goals. Do not expect a significant portion of your purchase price to come from the earnout and only enter into an earnout if you are happy with the amount you will receive upon closing.

7. Negotiate Escrow and Limit Your Liability

A portion (usually 10-20%) of the purchase price will often be held in escrow for 12 to 18 months to ensure that you have complied with all of the representations and warranties you made to the buyer. As the seller, you of course want to keep the portion of the purchase price left in escrow low and the time it is kept there short.

If you do end up breaching a representation or warranty, it is important that your liability for that breach be limited in the purchase agreement. Ideally, your liability will be limited to the amount kept in escrow. If it is not, the buyer could claim a breach at any time and demand a substantial portion of the purchase price back.

8. Engage in Tax Planning

Plan ahead to avoid any surprises when tax season comes around. Speak to your attorney and tax advisor early if you intend to engage in tax planning and consult them on how the structure of the sale will affect your tax liability.

9. Manage Your Time

The process of selling your business may take as much as six months to a year. While you are walking through steps one through eight, your business will often still be operating and may see a decline in performance while its owner is preoccupied with investment bankers, lawyers, and buyers. Delegate some of your former responsibilities to avoid your company’s performance taking a hit during this time, which may also impact the final purchase price.

10. Signing a Noncompete or Employment Agreement

You and sometimes some of your key employees will be expected to sign a noncompete agreement as part of the transaction, prohibiting you from engaging in a certain type of business for a certain number of years within a specific geographic area. Your lawyer can help you narrow the scope and shorten the length of the noncompete agreement.

Occasionally, the buyer will want you to stay with the company to either help with the transition or continue to run the company. If you are prepared to stay with the company, it is best to agree on the terms of your employment early rather than wait until the transaction has almost closed, as that is when you have more leverage.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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