“I have never cared what something costs; I care what it’s worth.” — Ari Emanuel
Brokers and M&A experts know that the sale of a business should follow a pre-defined set of steps from planning to marketing, to closing the deal.
Taken as a whole, the steps form a process which helps to ensure a smooth transaction for buyer and seller.
These same experts also know that few wholesalers follow the process.
With so much buying and selling going on in the beer industry, it’s more important than ever to understand what goes on in each of the Five Stages of a Business Sale so you can plan and prepare for a smooth transaction.
Understanding the process, and the importance of completing each step thoroughly, will go a long way towards a successful closing.
With this in mind, below is a summary of the M&A process that you can use, should your business ever enter the mysterious world of transaction planning.
The business sale transaction process is typically 5-12 months, but there’s no such thing as typical.
Some deals get done quickly in a matter of months while others can drag on for well over a year. The 5–12-month range is an approximate, as each deal has its own unique aspects.
The process is divided into five stages:
- Pre-marketing
- Marketing
- Bidding
- Closing
- Post-Closing
Pre-Marketing Stage
This stage is where you get your business ready to be put on the market.
The time period varies but expect this to take 4 to 8 weeks. During this time, valuation models are completed so you have a good understanding of the asking price.
The buyer universe will be defined – a list of your potential buyers – and it will be narrowed down to the best candidates.
Data, reports, and information are assembled, and a Confidential Information Memo is prepared. The Memo will serve as the meat of the marketing packet that will be sent to prospective buyers.
Marketing Stage
This stage takes 4 to 12 weeks. Buyers are contacted about the opportunity. If they are interested in taking a look, they sign a Non-Disclosure Agreement (NDA) to protect confidentiality, and the Confidential Information Memo is sent to them for review.
On-site visits may take place during this time period, and non-binding indications of interest may also be communicated.
Bidding Stage
This stage takes 1 to 4 weeks. Preliminary due diligence is conducted by the buyer, and Q&A takes place between prospective buyer and your representative (usually a broker, lawyer, or accountant).
The prospective buyer seeks to learn a little more about the company and clarify any items they find in the Confidential Information Memo.
Letters of Intent (LOIs) are received and negotiated with prospective buyers. Bids are evaluated, and a finalist is selected.
The finalist is the lucky winner who you will allow into the inner sanctum of your business to conduct their due diligence.
Closing
The time between selecting a finalist and closing the deal is 10 to 16 weeks.
The general rule: It always takes longer than you think it will.
During this stage, negotiations are made towards a definitive purchase agreement (Asset Purchase Agreement, or Stock Purchase Agreement).
These agreements contain all the nitty gritty legal details you never wanted to know about, but now you have to.
The buyer conducts final due diligence – looking into past tax returns, financial statements, reviewing corporate records, supplier contracts and any environmental concerns regarding real estate.
Additional agreements, such as covenants not to compete or consulting agreements are prepared, and approvals are obtained from suppliers.
The definitive agreement is signed, the closing occurs, the new owner takes the keys and you ride off into the sunset. But not so fast Cowboy, there’s the small matter of post-closing items to deal with.
Post-Closing Stage
When is a closing not really closed? When there are obligations that need to be fulfilled after the buyer and seller have signed on the dotted line. And that happens in just about every sale transaction.
The timeframe of the post-closing stage can last 6 to 36 months.
During this time working capital adjustments are made – these may include adjustments to inventory and accounts receivable, for example.
Inventory value is often an estimate at the closing date and isn’t confirmed days or weeks later. Any resulting difference in inventory value becomes a post-closing adjustment, and either the buyer pays or the seller returns the difference.
An escrow holdback is often part of the deal.
Buyers want assurances about what they are buying, and what the seller has represented about the business. The escrow holdback provides an insurance policy for the buyer as financial protection.
A percentage of the sales price, typically 5% to 10%, is held back at closing and put into an escrow account.
The escrow funds are held back for 6 to 36 months. During this time period, the escrow account can be tapped to pay for problems discovered with the seller’s representations (unreported liabilities, misrepresented financial information, etc.)
At the conclusion of the holdback period, the remaining funds are returned to the seller.
Pre-marketing, marketing, bidding, closing and post-closing are the Five Stages of a Business Sale.
Whether you are a buyer or seller, understanding these five stages, and your obligations in each, is critical to ensure a smooth transaction.
Learn the process, know what to expect, and close that deal.
P.S. Whether you’re planning a transaction next year or ten years from now, we’re here to help you build a business that’s ready when opportunity comes. Learn more about my 1:1 financial coaching packages here.
