What to Expect From the 6 Legal Stages of an Acquisition

Nothing derails an acquisition faster than legal. It’s the most critical aspect of a sale but often it’s ugliest. Fail to understand the legal process of selling your company and you might end up with a lower purchase price, or worse, no sale at all. 

Legal is dry, but it’s not hard. You can think of it as a journey of six stages. The further you progress, the more serious your buyer, and the likelier you’ll close the sale. I’ve listed these stages below. Study them well and you’ll find acquisitions needn’t be so intimidating.

(Please note – I’ve listed these stages in chronological order but the steps might intermingle a little.)

Stage 1 – The Letter of Intent (LOI)

A Letter of Intent (LOI) is the first sign of serious buyer interest. It’s a rough draft of how the sale will go down but with plenty of negotiation room. You or the buyer can write the LOI but both of you must sign it. An LOI typically includes:

  • Purchase price.
  • Due diligence requirements.
  • Applicable deposit.
  • Exclusivity period.
  • And any other relevant terms and conditions. 

While an LOI is non-binding, it commits you to a period of exclusivity (in return for a deposit) while the buyer pops the hood of your business and takes a look inside. The LOI should, therefore, include a Non-Disclosure Agreement (NDA) to protect your data, intellectual property, and other sensitive company information. 

Stage 2 – Due diligence

Due diligence is an audit on steroids. The buyer will analyze your financial metrics and projections, your technology, staff, liens, debts, creditors, and lots more with the precision of a forensic pathologist. It can be a stressful time, but remember the buyer is ensuring there are no nasty surprises after the deal closes.

My best advice to you here (unless you’re selling a very small business) is to lawyer up. Hire the best Mergers and Acquisitions lawyer you can find and follow their lead. While you can do most due diligence on your own, you’ll need expert advice to speed up the process and avoid mistakes that may cost you time, or worse, the sale itself

Stage 3 – The Purchase Agreement

The purchase agreement is a legally binding document that cements the outcome of negotiations and commits you and the buyer to the sale. Again, either of you can write the purchase agreement, but don’t sign it until your lawyer has looked over the details and assured you it’s safe to do so. 

Pay particular attention to any guarantees or obligations on your side. For example, the buyer might’ve asked you to resolve an issue that arose during due diligence within a certain timeframe. While this is normal, you don’t want to be on the hook for something years after the sale. Your post-sale responsibilities and liabilities should be few and expire no later than a year (ideally). 

Your lawyer really earns their bread here. Hire someone good who has your interests at heart. You need an expert, so don’t “bootstrap” this part of the acquisition process. Purchase agreements can stretch to 100s of pages of dense legalese. It’s anything but light reading. 

Stage 4 – Buyer payment terms

Ideally, you want a cash sale. On the buyer side, however, this won’t always be possible. The buyer might need financing from the bank. In this case, the sale hinges upon a credit decision and you should get assurances before signing the purchase agreement. 

Some buyers might also ask for seller financing where you let them pay in installments after a downpayment. Obviously, this is riskier than a cash deal. If the buyer defaults, you have to go through the courts to settle up and who knows what could happen to your business in the meantime. 

That said, if your lawyer thinks it’s okay, a seller financing deal beats no deal if you’re in a hurry to sell. Either way, It’s crucial you agree buyer payment terms in advance of signing the purchase agreement. 

Stage 5 – Local laws

Be mindful of how local laws affect the sale. There will be certain rules to follow before, during, and after the sale for you and the buyer. Be sure to follow them or local regulators might delay or halt your sale. You might even face financial penalties. Some things to consider:

  • Liens and other debts. If you can’t settle what’s owed to creditors, inform the buyer of what’s outstanding. Contact your creditors, too, to ensure they’ll offer the same line of credit to the buyer, otherwise you might have to settle before the exchange of ownership takes place. 
  • Shareholders. If you don’t have any, great, otherwise you might need their approval before selling the business as well as offering them the chance to sell their shares in advance of the acquisition. 
  • Taxes. Sales tax, for example, varies state to state. In some states, you’re responsible for paying sales tax, but in others, you’re responsible for collecting sales tax from customers. In either case, ensure nothing is outstanding before exchanging ownership. 

Stage 6 – Transfer of ownership

Phew. You’re almost there. Once you’ve parried and countered your way through negotiations, purchase agreements, and state law, the final step is to legally hand over your business to the new owner. There’s very little that can go wrong at this stage. All’s that’s left is a wedge of contracts to sign and that’s it. You’re home free. 

Before I sign off, I’d just like to state for sake of clarity that I’m not a lawyer and in no way should you consider the tips above legal advice. I’ve simply outlined a legal framework I’ve observed in many acquisitions, including my own. At the very least, this will prepare you for discussions with your lawyer, and can make preparations a little easier for both of you.