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Blog Business Owners FAQ, Part 4: The Acquisition Offer
Travis Watters March 1, 2015 Business Owners FAQ
Below is Part 4 to the Business Owners FAQ. The following are the other segments of the FAQ in the suggested order of reading:
When should I accept an acquisition offer?
A seller can lose tremendous power the moment it agrees to a “no-shop” agreement not to talk to any other potential buyers. The buyer’s objective will be (and should be) to get the seller to make that commitment. However, a seller should not make that commitment until it is determined that the buyer is capable and committed.
Sellers can refuse to enter into a stop-shop until the buyer has a nonrefundable deposit on the line. Usually this deposit is not entirely nonrefundable, but it would take a major fraud, misrepresentation, or non-truth to derail the transaction at this point.
If the buyer needs to do general industry research or needs to look more carefully at financial information to decide about going forward, the seller should encourage this action in advance of entering into the stop-shop agreement.
By doing so, the seller is saying: “When you are done, and you are sure that you want to buy this company, we will be glad to talk about a binding contract. Until then, we will continue to talk with you and to provide information, but reserve the right to court other suitors as well.”
It is also important, before you enter into a one-buyer commitment by accepting the acquisition offer, to ensure that all key elements of the deal have been agreed to, at least in principle. For example, clarify precisely what is to be purchased. Does the price paid entitle the buyer to all assets? What about cash? Is the buyer assuming all liabilities, too? What transition time from the owner, or post-closing employment requirements, will be required to complete the deal? What will the seller want in key representations and warranties? Will they seek indemnifications on some matters post- closing? These are sensitive and difficult issues, but the seller has maximum bargaining power to deal with these issues before entering into a no-shop agreement.
Once I have accepted an acquisition offer, what else will need to happen?
The toughest part of getting to closure after accepting an acquisition offer is agreeing on the details of the definitive purchase agreement. Agreements are long, complex, and critically important to the seller’s chances of keeping all of the proceeds received at closing. It can take anywhere from a couple of weeks to several months to work through the details of the agreements, which can reach 100 pages or more.
These documents are fundamental and critical to the deal and, until they are done and agreed to, there is real exposure to the seller. Representation and warranty issues are critical because they determine whether or not the buyer can come back to the seller for indemnification after the sale.
Due diligence and access to employees and customers are critical. Solutions must be designed to satisfy the buyer’s need for information without risking the seller’s base business stability. The deal is never closed until it is closed and funds have been wire transferred. Until then the risk of non-completion is always present.
Continue reading onto Part 5 to learn about the most common and costly mistake business owners make in selling their business as well as some overall closing thoughts. You can also go back to Part 1 (When Should I Sell My Business?), Part 2 (Potential Buyers), or Part 3 (True Market Value). Please feel free to contact us directly if you have any questions or if you are interested in exploring a possible sale of your business. You can also learn more by requested one of our publications. In particular, our book “The Practical Guide to Selling Your Business” and the article “Uni’s 12 Value Drivers to Increase Corporate Valuations” are very valuable to business owners interested in learning more about selling their business. We hope to hear from you soon.
Travis WattersBusiness Owners FAQ, Part 4: The Acquisition Offer 03.01.2015