The acquisition process

Transaction process from the seller’s point of view

Negotiating the sale of the business is the main task, which affects the course of the other processes. For the sale process itself, the seller should prepare information material, obtain a valuation of the business and gather documentation for the upcoming negotiations. If the seller hasn’t yet consulted business brokers and professional advisers about the sale, this would be the time to do so. Writing a sales memorandum, sometimes also known as an information memorandum, is often part of the sale process. It’s a factual representation of the company as well as its markets, finances and prospects. The sales memorandum shouldn’t be an advertisement but rather a relatively objective description of the company being sold, stating the positive aspects of the business and the reasons why it’s an attractive investment prospect. As the sales memorandum contains detailed information about the business, it’s typically distributed only to potential buyers who will be asked to sign a non-disclosure agreement (NDA). 

To identify these buyers, the seller can prepare a short summary of the sales memorandum, also called a teaser. The teaser is usually distributed to a wider audience to pique the interest of prospective buyers and establish contact with them. The seller will often have pre-negotiations with the most relevant buyer candidates and ask them for an indication of the price they would be willing to pay. Based on these preliminary discussions and prices, the seller then chooses one buyer to engage in the actual transaction negotiations with and to have access to detailed information about the business. At this stage, the buyer conducts further analyses and due diligence, usually with the help of a team of advisers. 

The seller and the buyer negotiate the details of the transaction and start drafting a transaction agreement (in the case of share sale, a share purchase agreement or SPA)  in which the key terms and conditions of the sale are agreed on. The transaction agreement can be drafted by an external or internal legal counsel. Both parties should seek support from a legal professional for the negotiations. The matters agreed on during the negotiations will be documented in the transaction agreement and the buyer may adjust the price during the process as a result of the negotiations and access to further information. 

 

Transaction process from the buyer’s point of view

When the buyer becomes aware of the business for sale, they can learn more about it in the teaser. If the business seems like an attractive prospect, the buyer should indicate that they are interested in it and initiate discussions with the seller or the adviser representing the seller. Once the seller has all the information they need, they usually expect the buyer to name a preliminary price at a rather early stage. The buyer should therefore be prepared to offer an acceptable price given the sector the target company operates in. The indication should be somewhat precise so that both parties will have a realistic estimate to work with from the start. Building trust between the buyer and the seller is an integral part of the sale negotiations, so it’s important to be transparent and earn the trust of the other party. The price can be reviewed during the process as the buyer gets access to further information but any changes to the price should be justifiable for the sake of transparency in the negotiations.   

Once several buyers have given an indication of the price they would be willing to pay, the seller usually chooses one to continue the process with. At this stage, the prospective buyer gets access to more details about the business and conducts due diligence to minimise the risks involved in the acquisition and to determine the sale price. In most cases, due diligence is carried out toidentify any potential financial, tax and legal issues and risks. Depending on the sector, it may also be necessary to analyse environmental issues and the technological set-up or aspects related to the staff and company culture. Due diligence is conducted by a specialist familiar with the sector who will compile their findings in a report for the buyer. If the investigation reveals any material risk factors or negative aspects from the buyer’s point of view, these will be addressed during the negotiations and eventually taken into account when determining the final price. The buyer can mitigate the risks by making sure liabilities and obligations are agreed on in detail in the transaction agreement. 

Once both parties have agreed on the terms and conditions of the transaction, the price and this has been documented in the sale agreement, it’s time to sign the agreement. By signing, both parties undertake to complete the transaction under the agreed terms and conditions. In most cases, however, the transaction will be closed on a later date. When closing the deal, the buyer pays the agreed price to the seller and the ownership and liabilities are officially transferred from the seller to the buyer. 

Financing negotiations between the buyer and their finance provider

While the buyer is engaged in the transaction negotiations, they are also simultaneously seeking financing from finance providers, such as their bank, to pay for the acquisition. Financing should be sought as early as possible to ensure a smooth process and to avoid any unpleasant surprises. When negotiating for financing, it’s important to understand that the finance provider will be your partner in the acquisition and that they will assume the similar risks as you are. Your finance provider will expect to receive extensive information on the acquisition. It will analyse and comment on the data as well as ask follow-up questions. This part of the process also benefits the buyer, as it will support you in the acquisition process and help identify the risks involved. If you want to succeed in the negotiations with your finance provider, you should involve them at an early stage and see them as a partner with whom you can have open communication and build a relationship based on mutual trust. 

The process of obtaining financing is tied to the transaction process. Before you give the seller an indication of the price, you should have had preliminary discussions with your finance provider to ensure they are willing to support the project. You will be able to sign the transaction agreement once you have obtained a binding financing offer and a favourable credit decision. The loan is drawn down in connection with closing the transaction.