So you want to own your own business - Part 8

Peeling the Onion

The process of disclosure by a seller is similar to peeling an onion. In order to pique buyer interest, some disclosure of a general nature is common, often in the form of a broker’s presentation or memorandum.  The buyer will have signed a nondisclosure agreement and in exchange be given some high level financial and business information. 

At this point an instrument known variously as a letter of interest, term sheet, expression of interest or something similar may be drafted by the buyer and presented for the seller’s consideration.  They are usually nonbinding in terms of any commitment to buy or to sell, but the benefit is that they lay out the terms broadly, and the buyer will often have also gotten a stand-still arrangement wherein the seller ceases to market the business or entertain other offers.  This is because the time involved, and the cost to the buyer of using their team of experts to assist them, is an investment that the buyer doesn’t want to see go up in smoke because the seller was still out looking for interested parties.  Think of it as a pre-engagement ring- the couple has agreed that they want to get engaged but they are not actually yet engaged.

​The attorney (usually the buyer’s attorney) will next draft a definitive agreement which is generally referred to as either a stock purchase agreement or an asset purchase agreement.  The purchase agreement (see Part 7 of this series) lays out with specificity all the terms, conditions and requirements of the parties.  It is a binding contract and should not be entered into lightly.  With that said, too often parties in an acquisition want to negotiate terms of the agreement right down to closing.  As this has the effect of delaying or making infeasible some due diligence that should really be done, I recommend against this practice.  The purchase agreement should be hammered out with appropriate contingencies written in for items not yet fully investigated. 

Once the purchase agreement is signed, all parties involved have a road map to closing.  If not already in place, the seller should now provide full access to the buyer, who should attempt to minimize disruption to the business, and be sensitive to confidentiality needs of the seller.  Because no transaction is a sure thing until it’s done, the seller rightly will be concerned about fallout from a failed sale- if the employees know about it they begin to feel insecure in their jobs, and if customers know, they may be jostled into considering a change to a competitor. The method and timing of informing interested persons about the planned acquisition is also of great importance to the buyer, who usually is not only hoping to retain key employees and customers, but is paying for just that expectation in the agreed-on purchase price.

If the transaction falls under the purview of bulk sale statutes, the parties should engage a business escrow agent to initiate the notice process, as the notice to creditors process takes about 45 days, assuming no delays.

It is important that the buyer’s lender, if any, is involved in the selection of an escrow agent as the agent will be relied on to hold funds and disburse them appropriately.  If an escrow agent is not used, the buyer is responsible under California law for certain aspects of the transaction, including obtaining tax clearances.  The buyer’s counsel can handle this for them, but in all cases the process of obtaining tax clearances takes at least thirty days, often longer.  Because of this, it is advisable to get this started early, at least as soon as you have a signed agreement.

If the seller has a broker, they are often the point person for the logistics of closing, in conjunction with the buyer’s attorney or designee.  As any experienced broker will tell you, it is imperative for the successful completion of the transaction that things be moved along expeditiously, and this normally involves some poking and prodding. Just as an onion left on the counter too long begins to smell, and eventually ends up in the compost, so a stagnating business deal ends in nothing to show for it but lost time, foregone opportunity, and probably some unrecoverable money.