When preparing to sell their company, business owners always ask: what is involved in the sale process and how long will it take? While perhaps not the sexiest of topics, being knowledgeable about the phases of the sale process helps owners understand what to expect and what is expected of them during each stage of the transaction. Each phase includes a dedicated set of activities designed to help the owner achieve their objectives and bring the sale process to a successful close.

Experience has taught us that there are a series of natural breakpoints that happen during the transaction. Thus, instead of providing a “pat” answer to the question, we prefer to look at the sale process in four distinct phases. In this post, we will summarize each phase and address Phases I and II in more detail. In the next post, we will address Phases III and IV in more detail.

Phase I: the Diligence Phaseincludes gathering key documents and data, preparing a valuation of the company, creating an Information Memorandum and no name “teaser” (used to market the company to prospective buyers), developing a marketing strategy for the business, and researching potential buyers. Phase I is typically a two-month process.

Phase II: the Marketing Phase – includes making initial contact with prospective buyers; distributing teasers and non-disclosure agreements (“NDAs”), distributing the Information Memorandum to buyers that signed the NDA, answering questions raised by buyer candidates, requesting Indications of Interest (“IOIs”) from buyer candidates, and inviting select buyer candidates to a management presentation. Phase II is also typically a two-month process.

Phase III: the Management Presentation Phase – the owner and management team formally present the company to prospective buyers. After the completion of management presentations, buyer candidates are asked to submit a Letter of Intent (“LOI”). The owner and their team of advisors (lawyers, investment bankers, business advisors, accountants and the like) evaluate the LOIs to determine the “best” proposal, and negotiate the LOI (with one or more parties) to improve its terms, ultimately executing one LOI during this phase. Phase III is typically a two-month process a well.

Phase IV: the Buyer Due Diligence and Documentation Phase – the buyer undertakes a thorough review and analysis of the company’s primary information, including (but not limited to) corporate organization, financial and tax, customer, vendor, contracts, employees, benefits plans, insurance, IT, environmental, etc. in order to confirm summary information previously provided to them and to confirm that there are no latent issues or liabilities. Concurrent with the diligence portion of this phase is transaction documentation, including the stock or asset purchase agreement and numerous other agreements as appropriate to the transaction such as employment agreements, leases, management incentive plans, etc. In short, this phase encompasses the buyer’s diligence and documentation, and if all goes as planned, funding and closing the transaction. Phase IV is typically a three-month process.

To elaborate, during Phase I, aka the Diligence and Preparation Phase, the seller and their team must undertake a series of exercises, including:

  • document accumulation
  • preparing quality of earnings (“QOE”)
  • valuing the business
  • simplifying and crafting the company’s story and pitch for potential buyers
  • preparing an Information Memorandum for marketing purposes, including a projection of the future
  • determining what type of buyer they are seeking (i.e., strategic, financial, Private Equity Group (PEG), etc.)
  • developing a list of potential buyers

There is a lot of preparation that goes into this pre-sale or “prequel” phase. Owners often ask, why do we have to wait to sign non-disclosure agreements or LOIs? This exhaustive preparation process is a big part of the reason why. While a seller may be champing at the bit to take the company to market, it pays to focus and do the legwork up front. Phase I can feel like a bit of a slog, and it can be challenging for owners to generate momentum going into the actual sale process, but again, the payoff is well worth it if it achieves their objectives and results in a successful closing.

It is also important for sellers to keep in mind that they have spent years building their company. As such, their marketing materials should tell a compelling story, and be well-packaged and impeccably organized. This careful attention to detail matters; not only does it help move a sale along more efficiently, it also increases a buyer’s comfort level and confidence in the company, leading to a higher valuation and the greater likelihood of a completed transaction.

After a flurry of internal preparation by the seller and their team in Phase I, the owner can turn their attention to outbound marketing activities in Phase II. During this stage of the sale process, the seller engages in the marketing efforts in an effort to develop excitement and interest among potential buyers. This includes making initial contact with prospective buyers and distributing teasers, confidentiality agreements, and the Information Memorandum. After the marketing lures are thrown out and buyers begin to bite, buyer candidates are asked to submit indications of interest (“IOIs”). An IOI is non-binding, but provides the buyer’s rationale for considering the acquisition, the proposed terms, a valuation range, and the potential structure for the deal. The owner can use the IOI to determine if the buyer is serious, and whether or not to invite them to learn more about the company during the management presentation phase (Phase III). From time-to-time, Phase II can be compressed, particularly if there is an eager buyer that is prepared to pay the owner a premium above fair market value in order to preempt the sale process.

Like constructing a house, selling a company requires a series of steps and stages that build upon one another. Just as a builder would hang drywall before painting the interior, business owners must complete the proper preparation and marketing before moving on to negotiating with buyers and closing the deal. When done right, each of the four phases of the sale process helps create a solid foundation for a successful transaction where the seller reaps the benefits of their hard work.

In the next post, we will address Phase III – The Management Presentation Phase and Phase IV – the Buyer Due Diligence and Documentation Phase.