Navigating the process of having your company acquired through a transaction for a merger and acquisition (M&A) can seem complex but breaking it down into clear steps helps demystify the process. Here’s a general overview of what you can expect once you’ve found a buyer and signed a Letter of Intent (LOI).

1. The Letter of Intent (LOI)

Once you’ve found a buyer, the process usually begins with the signing of a Letter of Intent (LOI). The LOI outlines the agreed-upon purchase price and the general structure of the transaction. At this point, the buyer has likely already conducted some initial business and financial due diligence to evaluate the feasibility of the acquisition and confirm the company’s valuation.

Tip:

LOIs are often non-binding, but they set the tone for the rest of the transaction. Be sure to negotiate key terms in the LOI with the help of an experienced attorney, as it will influence the final agreement.

2. Due Diligence

After the LOI is signed, the buyer will continue with more in-depth due diligence. This phase involves an extensive review of your company’s legal, financial, and operational matters. While the initial due diligence focuses on the company’s business and financial health, the buyer now moves into legal due diligence, while continuing their business and financial due diligence efforts. This means scrutinizing contracts, compliance records, intellectual property, employment agreements, litigation history, financial documents, reviewing any potential tax issues, and other legal documents.

Tip: 

Prepare EARLY for Due Diligence.  Start by organizing all key legal, financial, and operational documents well before entering into negotiations. Having your house in order will not only speed up the process but also help prevent any last-minute surprises that could derail the deal.  Make sure to talk to your legal counsel to confirm what is necessary in this pre due diligence phase.

3. Negotiating the Definitive Agreement

Once due diligence is underway, your legal counsel and the buyer’s legal team will begin negotiating the terms of the definitive agreement. This agreement is the final document that solidifies the transaction, based on the framework laid out in the LOI. An M&A transaction can be structured in many different ways, here are a few of the most common:

• Stock Sale: The buyer acquires the shares of the company, taking control of both its assets and liabilities.
• Asset Sale: The buyer acquires specific assets of the company (and possibly assumes certain liabilities), leaving others behind.
• Merger: The buyer merges the target company into its own or a new entity.

TIP:

Each structure has different legal and tax implications, so it’s crucial that both you and your buyer fully understand the impact of these options. Your legal counsel will play a pivotal role in negotiating terms that protect your interests.

4. Finalizing Agreements and Government Approvals

As the legal teams finalize the definitive agreement, both sides will ensure that all due diligence is complete and any necessary governmental filings have been made. At this stage, the company and its owners must also approve the deal, involving board approvals and the requisite shareholder approvals.

To Note:  

This stage can take some time. Timing depends on the complexity of the deal, the size of the companies, and whether regulatory approvals are needed.

5. Closing the Deal

Once all the required approvals are in place and the necessary documents have been finalized, it’s time to close the deal. During the closing, each party signs the closing documents and then the ownership of the company (or its assets, depending on the structure) is transferred to the buyer. The terms of the definitive agreement dictate the specifics of the ownership transfer.

Tip:

Be aware that post-closing obligations can arise, such as transition support, non-compete agreements, purchase price adjustments, escrow releases, holdback releases, milestones or other performance-related provisions.

6. Payment to Original Owners

At the time of closing, the original owners of the company are paid their portion of the purchase price. The payment is distributed according to the terms laid out in the definitive agreement, based on a pro-rata distribution.

Final Thoughts

The M&A process, while potentially stressful, is more manageable when you understand the key steps. Each transaction will differ based on the structure and specifics agreed upon in the LOI, so having a trusted legal advisor to guide you through the process is essential. A well-prepared and experienced team can help ensure that every detail is handled, from due diligence to final approval.

Navigating an acquisition is a significant moment for any company, and with the right guidance, you can confidently move through the process.

Contact Rayna Sparkes for more information:

• Email: rayna.sparkes@momentuslegal.com
• Phone: 541.221.8580
• LinkedIn: @RaynaSparkes