Acquiring a Business – An Overview of the Process

February 12, 2019 by Alex Estrin

Whether you're a business looking to grow through acquisition or an individual looking to acquire your first business, the acquisition process generally contains the same high-level steps. In the paragraphs below, Alex Prasad with AEGIS Law, and Alex Estrin with BizEx lay out a high-level summary of the process of acquiring a business.

1. Form an advisory group

If you are an existing business you may already have an in-house acquisition team. If you do not, at a minimum, a team will likely include a transactional attorney to draft the deal documents and either a broker or an investment banker. The broker/investment banker can help you identify targets and provide useful context re: price and other deal terms they see in the same industry as your target.

2. Conduct public due diligence

While a deep dive into a company's books and records will come before closing, before investing much time and many resources into your acquisition process, you may want to learn everything about the company that is publicly available. Has the company made any headlines lately, either positive or negative? Where is the company located? Any news of expansion/contraction in the press?

3. Approach and sign confidentiality agreement

Assuming your public diligence comes back positive, you'll want to approach the company. Before engaging in any discussion a target will likely ask that you sign a confidentiality/non-disclosure agreement. “The terms of such an agreement vary, but at a minimum, it will prohibit you from using the information provided by the company for any purpose other than the evaluation of the prospective transaction,” says Alex Prasad.

4. Draft a term sheet/letter of intent/memorandum of understanding

Shortly after the confidentiality agreement is negotiated and signed you will likely be given access to "deep dive" information about the target. Assuming this diligence process proceeds positively the pressure to begin negotiating a term sheet will mount. A term sheet (synonymous with a letter of intent or memorandum of understanding) is the roadmap to the deal. “If the business is listed with a broker, the broker can help you prepare the term sheet,” says Alex Estrin. Usually non-binding in nature, with the exception of a few provisions, the term sheet sets the major deal terms that will be fully built into the transaction documents. In general, the more detailed a term sheet is the better, however on some contentious issues the parties may prefer to remain silent and negotiate as the deal gathers momentum to a closing.

5. Drafting of deal documents, continuing diligence

As diligence continues the heaviest lifting for attorneys begins in drafting the deal documents. The purchase agreement will be the longest and most substantive document; the disclosure schedules can be the largest time commitment for a seller depending on the Buyer's requests. Diligence "surprises" may require modification to the term sheet terms.

6. Closing

A deal is never done until the money has been wired, but if you formed the right team of advisors and your diligence process is thorough the number of surprises and other detours on your path should be few.

This information is intended for informational purposes only. Prior to making any decisions regarding the acquisition of a business, readers should seek the advice of an attorney and tax professional.The publishing of this article does not constitute endorsement, recommendation, or favoring by BizEx.

Alex Prasad, AEGIS Law business attorney, is a contributing author to the BizEx blog. Alex specializes in middle market M&A, as well as working with early-stage and startup companies.

How to Buy, Business Sales Process