M&A transactions tend to proceed in specific “phases.”
To help parties manage expectations and better understand the process, this blog post provides an outline of the phases that buyers and sellers can expect throughout an M&A process.
Of course, some of the phases below may occur simultaneously or overlap with others, while others may not be relevant to a given transaction at all. Moreover, the sequence below and details will vary from one transaction to the next.
10 Phases Of An M&A Transaction
1. Get the “house” in order
Seller: Sellers should take the time and effort to ensure that their books, records, contracts, financials, websites, entity status, intellectual property, licenses and permits and other business transactions are organized, valid and in good order. This type of record keeping and organization should be an on-going process, ideally having begun when the business was initially formed. If record-keeping has not been optimal since the company's inception, sellers should realistically expect that such organization will take time to catch up, and may need to begin such cleaning up a few months to a few years before commencing the sale process. Sellers should expect that the target company's overall operations, books and records will be thoroughly scrutinized by prospective buyers, lawyers, lenders, underwriters and others, as part of a robust due diligence process. Being highly organized will go a long way in facilitating a smooth and timely transaction.
At this stage, sellers should also perform preliminary reviews of their existing agreements to understand any restrictions on assignments or changes of control. Obtaining consents for assignments or changes of control can take a long time. Being strategic and in certain cases starting that process early can be extremely helpful, though in other cases alerting contract counterparties in advance to a potential transaction may be inappropriate.
Buyer: Buyers should begin considering their financing options, credit status and sources of funds, including whether an SBA loan, a loan guarantor, and/or other credit to finance the upcoming potential acquisition will be needed. Buyers can also use this time to line up "friends and family" participation, a joint venture partner, or other investors. Buyers will also conduct market research at this preliminary stage to determine what industries or business types they are interested in pursuing, and whether any special regulatory or licensure requirements will be needed.
2. Engagement of business broker, attorneys and other third parties
Seller: Sellers may interview and select a business broker for the potential sale of the target company. Later, sellers also engage legal counsel, tax advisors and other third consultants as needed.
Buyer: Buyers engage legal counsel, tax advisor, and other third parties, as needed, to assist with due diligence, documentation and closing.
The parties may also line up an escrow agent or paying agent to assist with the closing process and transfer of assets.
Each party should consider engaging its own legal counsel at this early stage, to assist in the negotiation and drafting of the various third party engagement agreements, the LOI, and the definitive transaction agreements, and to lead the charge on legal due diligence. The Law Office of Jennifer M. Settles has vast experience representing parties in M&A deals . . . and does so at affordable rates. Contact us today at (602) 617-3938 or through the Contact Form on our website, www.primelegalfreelance.com, for more information and a FREE initial consultation.
3. Preparation of marketing document
Seller: With the assistance of its broker, sellers may prepare a confidential information memorandum (“CIM”) or other marketing materials relating to the sale of the target company. This step is typically done in larger transactions and might be skipped in smaller deals. The business broker assists the seller in setting the sale price for the target company, preparing other information and disclosures needed for the CIM, and in disseminating the CIM to potential purchasers. Sellers must be careful to ensure that their marketing process does not constitute an offer of securities in violation of applicable securities laws.
4. Preliminary discussions
Seller: With the assistance of its broker, sellers begin identifying potential purchasers, engage in preliminary discussions with potential purchasers, and assess the viability of the different potential purchasers.
Buyer: Buyers assess potential target companies to purchase and begin a deep-dive review of the proposed target company's business model and financials to ascertain whether the target might be a suitable fit for the buyer.
5. LOI phase
Both Parties: Once the parties have determined that they are interested in one another, the next step is to negotiate, draft and execute a letter of intent (“LOI”) or term sheet. The parties should each engage their own legal counsel to assist in the negotiation and drafting of the LOI. Even in cases where the LOI is nonbinding, the LOI is an important step in a potential transaction with potentially significant ramifications, and accordingly each party should deploy appropriate effort and resources to negotiate and deliver a strong LOI.
6. Due diligence phase
Seller: During due diligence, the seller responds to due diligence requests from the buyer and buyer's legal counsel, financial and tax advisors, potential lenders and other representatives. From seller's perspective, it's extremely important to respond to a buyer's due diligence requests accurately, thoroughly and with transparency.
Buyer: A proposed buyer must always engage in thorough due diligence of the target company and its principals. Depending on the nature of the target company, the industry, market forces, transaction size, the degree of organization of the seller's books and records, financing conditions, and other factors, due diligence can take 30, 60, 90 days, or even much longer. A savvy buyer will use legal counsel and other third-party vendors, such as tax, accounting and environmental specialists where appropriate, to assist in due diligence.
During due diligence, the parties also assess the need for any regulatory approvals and/or third-party consents, and, through careful coordination with each other, begin the process of procuring such approvals and consents where appropriate.
7. Financing phase
Seller: Sellers should expect to remain engaged in due diligence during the financing stage, because buyers' lenders and equity investors (if any) will likely perform their own due diligence of the transaction. As a result, sellers will need to be responsive to lender/investor/underwriter due diligence requests in addition to any buyer diligence requests. Although the due diligence performed by lenders/investors/underwriters and buyers is typically similar in nature and scope, sellers should expect that there may be some variation as to the nature and depth of the inquiries.
Buyer: Buyer arranges the financing needed for the acquisition. This could come from cash on hand, third party loans such as SBA financing, equity investment, loans from friends and family, or other sources.
Buyers may engage legal counsel to assist in negotiating and drafting of loan documents, joint venture or partnership agreements, and equity funding agreements. Depending on a number of factors, arranging financing or equity investment from a partner can take a significant amount of time and can be a complex process with significant legal and financial implications.
8. Negotiate and draft transaction documents
Both Parties: While due diligence is progressing, the parties, through their respective legal counsel, begin negotiating and drafting the purchase and sale agreement and the other ancillary transaction documents. The terms negotiated in the LOI are used to shape the commercial and legal terms of the final transaction documents. Often, buyer's legal counsel prepares the initial drafts of the transaction documents, though sometimes seller's counsel prepares the first drafts. Either approach can be acceptable, though ideally, if given the choice, a party should opt for having its own legal counsel prepare the initial drafts of the documents.
Ancillary transaction documents may include a bill of sale, assignments of contracts, noncompete agreement, escrow agreement, stock powers, consulting or employment agreements, and more.
Depending on the complexity of the transaction and robustness of the LOI, the documentation stage of an M&A transaction can be relatively fast or might take weeks or months to compete. In any case, through the lead of their respective legal counsel, both parties must carefully negotiate and draft the transaction documents. Transaction documents can be highly complex and carry significant legal and financial ramifications for both parties, both at the closing and potentially for many years thereafter.
9. Preparation for closing
Both Parties: During this stage of the transaction, the parties get more specific as to preparation for closing. Buyer continues working through its detailed integration plan. (Note that in more complex or large acquisitions, integration planning will begin much earlier in the process). Additionally, the parties, through their respective legal counsel, finalize the definitive transaction agreements, the funding plan, and due diligence, ensuring that all conditions precedent to the closing have been satisfied. Often, parties will use a closing checklist to help ensure that no important closing items have been forgotten.
10. Closing and funding
Seller: If not already executed, seller executes all closing documents. Upon the closing, seller's signed documents are released to buyer (or the designated closing agent, if applicable). Upon receipt of the purchase price as required under the definitive agreements, seller effectuates the legal transfer and conveyance of the assets or entity to the buyer.
Buyer: If not already executed, buyer executes all closing documents. Upon the closing, buyer's documents are released to seller (or the designated closing agent ). Upon ensuring that all closing conditions have been satisfied, Buyer funds the purchase price by releasing a wire or check to the seller (or the designated closing agent), in exchange for its purchase of the assets.
Each phase of an M&A transaction can be complex and challenging, and the steps will vary by transaction The roadmap above is merely a rough outline of the steps which may occur in an M&A deal. Contact Jennifer Settles at (602) 617-3938 or through the Contact Form on our website, www.jserttleslaw.com, for a FREE initial consultation. Jennifer M. Settles, Esq. represents buyers and sellers in M&A and other commercial contract deals.
Also, be sure to read our other Blog posts for more in-depth discussions regarding LOIs, due diligence, M&A and other commercial transaction.
Jennifer M. Settles, Esq. is a corporate lawyer at the Law Office of Jennifer M. Settles. She advises clients on M&A transactions, commercial contracts, real estate matters, financing transactions and corporate law. To schedule a free consultation with Jennifer, please call 602-617-3938, or connect through our website.
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