By Louis Lehot, business lawyer and partner at Foley & Lardner LLP in Silicon Valley, and formerly the founder of L2 Counsel, P.C.
There are two desired exits for a company: to go public or be acquired. While companies often hope for a public exit, it is much more likely that, when the time comes, they will go through a merger or acquisition transaction, or “M&A” transaction. This article will provide an overview of eight key stages that typically occur as a company goes through a M&A transaction.
1. Preliminary conversations with potential buyers
Typically, transactions kick off as informal discussions between the company and one or more potential buyers. It may be helpful to enlist a banker to run an organized process for price discovery based on a well-drafted information memorandum, and to organize outreach to potential buyers that may be interested in your company, as well as to help guide these preliminary conversations to a letter of intent. The primary focus of these preliminary conversations is price and value exploration, along with fit and feasibility. Conversations regarding deal structure are to be had at a later stage of the transaction.
2. Execution of non-disclosure and non-solicit agreements with potential buyers
Before a potential buyer will agree to move forward with a transaction, you will be required to provide sensitive or confidential information. To protect this information, it is best to execute a non-disclosure agreement with any potential buyers. This will ensure that a buyer cannot walk away from the deal and then use confidential information provided during the discussions for their benefit. A non-solicit agreement should also be executed if you want to prevent buyers from recruiting members of your business team.
3. Receipt of a letter of intent from the buyer
When a potential buyer has decided that they want to continue with the transaction, they will provide the target with a letter of intent or term sheet to outline their proposed terms for the transaction. This acts as a framework for terms regarding the structure of the transaction, the purchase price, the structure of the earnout, indemnification, and any other terms associated with the closing of the deal. The buyer may choose to include an exclusivity provision in their letter of intent to prevent the target from engaging with other potential buyers. It is critical that a thorough legal review is performed by the target company’s legal team at this stage of the transaction, as once the term sheet is signed by the seller, the leverage can quickly shift to the buyer, and it will be more difficult to extract concessions.
4. Pre-signing period
Negotiate the definitive document
The definitive document is the formal document outlining all terms and conditions of the deal. Any terms proposed in the letter of intent may be renegotiated at this time if required. The final document will be negotiated and agreed upon by the buyer, target, and their respective legal teams. Negotiating the terms of the definitive document often takes several weeks.
Complete due diligence
The target will be required to provide any documents outlined by the buyer in a due diligence request list. These documents will cover matters such as corporate formation, financing, intellectual property, debt, commercial contracts, regulatory matters, licenses, and employees and consultants. At this stage, the buyer is concerned with circumstances that may impact the purchase price and result in additional terms and negotiations being required.
Populate disclosure schedules
Representations and warranties about the operation of the target will be outlined in the definitive document; this includes disclosure of matters pertaining to lawsuits or breaches of contract, if any. Disclosure schedules will qualify these representations and warranties and ensure that there is no misrepresentation and that the buyer does not have right to pursue an indemnification claim.
5. Signing of documents
Once the definitive document has been negotiated, finalized, and agreed upon, and any additional documents have been provided and considered, signing of the documents will occur. At this point, the deal may close if there are no additional closing terms to be satisfied.
If there are additional closing terms that need to be satisfied following the signing of the definitive document, the target and buyer will prepare and present all outstanding deliverables. Terms that may be satisfied during this pre-closing period include government approvals, and third-party or employee agreements. The number of terms that remain to be satisfied following the definitive document signing will determine the length of this stage.
7. Closing the deal
When both parties have met all terms outlined in the definitive document and funds are exchanged, the deal is closed.
8. Post-closing period
Once the deal is closed, you can focus your attention on your future endeavors, paying taxes, creating an estate plan, and thanking all that were key to the success of the M&A transaction. At this point, the buyer will be responsible for full integration of your business.