Buying a business is a significant investment, and there are various ways to finance the purchase. Common methods include bank loans (often guaranteed by the SBA) and ROBS.
For a potential buyer, it is never too early to start looking into financing. Particularly for SBA loans, the process can take from several weeks to several months. The date of the closing is often determined by when the buyer is able to secure its financing.
The pre-offer period is the time between when the seller puts their business on the market and when the buyer tenders an offer. It includes the seller providing the prospective buyer with information about the business so that the prospective buyer can decide if they want to pursue a deal and make an offer.
Before providing a prospective buyer more detailed information about the business, such as financial statements and sometimes even the identity of the business, the seller will typically require the buyer to enter into a confidentiality agreement.
A business can be on the market for days or months, or even longer, before the seller receives an offer. For some sellers, an offer never comes.
If the prospective buyer is interested in purchasing the business, they will submit an offer to the seller. The offer is often in the form of a letter of intent (LOI). The LOI sets out the basic terms that the prospective buyer would be looking for in order to purchase the business. In most cases the LOI is non-binding on the parties and is used to ensure everyone is on the same page before moving forward with the deal.
Once it has received an offer, the seller can either accept the offer as written, outright reject it, or return to the prospective buyer with a counteroffer with revised terms. If the seller provides a counteroffer, the parties can continue to negotiate the offer until both are satisfied with it. This back-and-forth can take up to several weeks.
Due diligence is the process of the buyer investigating the target business prior to the closing of the transaction. Once an offer has been accepted, the buyer will request from the seller detailed information about its finances, assets, and internal operations. The buyer wants to know as much about the business as possible to avoid surprises once it takes ownership.
Depending on what the buyer finds, it might use the information it learns to require the seller to make changes or repairs to the business and its assets, to demand new terms, or even to lower the price. The buyer may also decide to walk away from the deal based on the results of its due diligence.
The length and scope of due diligence will vary based on the size and complexity of the deal and the target business. In some smaller deals, due diligence can be accomplished in a matter of works. Due diligence in larger deals may take months to complete. Responding to due diligence can be very time-consuming for a seller and take them away from running the business during the deal.
Once an offer has been accepted, the buyer will begin working on the purchase documents. These documents include the purchase agreement and any other necessary contracts and exhibits. As the terms of these documents control the deal and so are very important, they are often highly scrutinized and negotiated by both parties. This process can take weeks to months.
In many deals, the purchase documents are signed once they have been agreed to by the buyer and seller before the closing (this is known as a delayed closing). This is often done to lock down the deal terms while waiting for the buyer to finish its due diligence and finalize its financing.
In other deals, the purchase documents are signed at the closing (called a simultaneous closing).
One of the most under-appreciated parts of the deal process is the planning for the transition of ownership to the buyer. Even the best deals can be disastrous without the necessary working on and execution of a good transition plan.
Many sellers are reluctant to begin transition planning until the purchase documents are signed. Until that point, it is very easy for the buyer to walk away from the deal. Once in contract, the seller can feel more confident about the deal closing. However, typically the earlier the parties engage in transition planning the more successful the actual transfer of ownership is.
The transition process often continues after the closing, with the seller agreeing to act as a consultant (paid or unpaid) to help the buyer in their first weeks and months.
The closing is officially the end of the deal. At the closing the parties sign any final documents, the seller receives payment, and the buyer takes ownership of the business. If the purchase documents were previously signed, the closing may be mostly symbolic.
Closings can be in-person around a conference room table, or virtual with e-signatures and the electronic sharing of documents. Virtual closings are becoming more common due to their convenience. Closings typically involve the parties as well as their lawyers and any brokers or investment bankers that were involved in the deal. Title agents, lending officers, escrow agents, and other advisors may also be involved.
The date of the closing is often determined by when the buyer is able to finalize its financing of the deal. Otherwise it is scheduled once the buyer has completed their due diligence.
While the deal officially ends with the closing, there are at times issues that aren’t able to be resolved until afterwards. Sometimes this is because they require the buyer to take over the business before they can addressed. Other times the delay may be at the insistence of the seller, or upon the mutual agreement of the parties in order to close the deal sooner.
Common post-closing issues include the transfer of licenses, contracts, assets, or accounts from the seller to the buyer. These can be handled quickly, or they can take months to resolve. Some deals also condition the final purchase price on the business hitting various operational and financial targets in the months – or even years – following the closing.
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