Typical Stages of a Business Purchase and Sale Transaction

The exact details and structure of a given transaction will vary from deal to deal. But there are typical deal phases involved in most transactions, each carrying a unique set of challenges and opportunities. The information below is a basic explanation of the common phases, but is only the tip of the iceberg when it comes to understanding the ins and outs of the transaction.

Letter of Intent/Term Sheet. While the deal truly begins well in advance of this phase (for the seller, this means preparing the business for sale; for the buyer, exploring and preparing for opportunities), the letter of intent marks the practical start of the transaction between the buyer and seller. In this phase, the parties negotiate the core terms of the deal. A good attorney strikes the right balance between addressing the necessary terms and bringing the parties to the table. Which terms should be included depends on the transaction, the industry and the intentions and mindsets of the parties.

Contract Preparation and Negotiation. Upon the signing of the LOI, the transaction moves full speed ahead. Drafting and negotiating the contract can take a good amount of time and should be structured to properly advance the client’s interests while avoiding too much one-sidedness – a party can be incentivized to breach an overly harsh contract. The contract should be thorough and comprehensive, yet fully understood by the client before execution. Walk through the agreement once, twice and three (or more) times with your attorney to make sure you fully understand all of the terms and conditions, the risks and liabilities, and your duties and obligations. At the end of the day, after all, it is your contract, not your attorney’s, so it is important that you fully agree with and understand each provision.

Due Diligence. Also contingent upon the industry and deal structure, this phase generally entails a review by the buyer of the seller to ensure that the seller can comply with the terms of the deal and sell what they are promising to sell. That sounds simple, but this is where most of the work in the transaction is done. Entailing a review of the financial, operational, tax, structural and legal history of the seller, this phase, if done properly, should tell the buyer whether to go forward with the deal and should help mitigate and prevent unpleasant surprises once closing occurs. The burden here is generally on the buyer to perform proper, detailed and exhaustive diligence reviews, but a wise seller makes as much information available as possible. The transaction will benefit from cooperative parties in the phase.

Closing. Facilitating closing often means herding cats and bringing many parties and conflicting interests together to the mutually beneficial, yet often elusive, target of completing the deal. Everyone may have the same general goal – completing the transaction – but getting there requires coordinating time frames, negotiating and guiding adverse parties, and aligning a host of details to actually close, fund the deal and transfer title.

Post-Closing. A well-thought-out deal structure often includes certain post-closing terms and covenants, and in most transactions, the job is not done once closing occurs. For instance, will the principal of the selling entity perform employment or consulting services after the sale? If so, for how long, what compensation, and under what risk and liability terms? Make sure your post-closing obligations are appropriate to the deal structure.

Each of these phases is described and can be viewed independently from the others; but, depending on the transaction, they often overlap and blend into each other. It is vital, however, to keep the goals of each phase clearly in mind as you move forward through your transaction.



The information herein is not legal advice and does not create an attorney/client relationship. The information is in the form of legal education and is intended to provide general information about the matter.  The above is not, nor is it intended to be, legal advice.  Consult your attorney with questions.