When it comes time to sell your business, or if you’re buying a business, the process can seem very intimidating. It’s helpful to understand the mechanics of the sale so you can know what to expect at each stage along the way. In this article, I’ll walk you through the 4 stages of a business sale:

Stage 1: Letter of Intent

Stage 2: Due Diligence

Stage 3: Purchase Agreement 

Stage 4: Closing

Before I dive in, know that the Purchase Agreement and the Due Diligence can be swapped in order – or they can both happen at the same time. 

Each deal is a little different in timing depending on the circumstances. For purposes of this article, I’m going to discuss them in the order listed above. There are a few differences for small businesses (I note those below), but for the most part, every sized business goes through these four stages.

Stage 1: Letter of Intent

When a buyer and a seller first start talking, it involves very basic information about the business – usually the type of business and the asking price. Most of the time, a seller will require a buyer to sign a Non-Disclosure Agreement (NDA) before providing any deeper information about the business. Once the NDA is signed, a seller may provide some basic financial statements, such as a recent Profit & Loss Statement or a recent tax return. Sellers don’t provide a lot of documentation before an offer is on the table.

When a buyer is ready to get serious about putting in an offer, they submit a letter of intent (LOI) to the seller outlining the offer terms. The LOI doesn’t have to cover every detail, so it usually includes those terms that are most important to the buyer. The LOI is signed by the buyer and sent over to the seller for consideration. There may be (and usually is) some negotiations at this point, until the seller is satisfied and signs the LOI. The LOI is non-binding (it’s not a contract), but its purpose is to make sure the buyer and seller are in agreement before either one of them uses resources to move forward. Once the LOI is signed by the buyer and seller, the deal starts to take shape and this stage ends.

Special Note for Small Businesses:  If a business broker is involved, the broker will usually (but not always) use a form contract where they fill in minimal information about the deal. This form contract can be used instead of an LOI because it gives the buyer a chance to get out of the deal for a period of time. But make no mistake, this form contract is an actual purchase agreement and is binding on the buyer after the deadlines pass – so keep that in mind!

Stage 2: Due Diligence

The name “due diligence” is just a term of art and it means an investigative period. The buyer gets to look under the hood of the business and get to the nitty-gritty. They usually look at the assets of the business, the client/customer lists and contracts, the financials, the employees and contractors – and other important issues that are relevant to every particular industry. 

The buyer usually sends the seller a list of what they want to review, and the seller gathers the documents or information.

This investigative period can be anywhere from a couple of weeks to several months. It’s in the seller’s best interest to disclose as much as they can to the buyer because if it’s later discovered, the seller could be held liable for any issues. The business should be an open book for the buyer to assess the good and the bad (no business is perfect).

At the end of the due diligence period, the buyer has a choice of whether or not to proceed with the purchase. If the buyer sees something they really don’t like, they usually walk away at this point. If they see some things that are concerning, then there may be some additional negotiations before the buyer will move forward. If the buyer sees things they can live with, the sale proceeds to the next stage.

Stage 3: Purchase Agreement

If the lawyers aren’t already involved, they definitely get involved at this stage to write the purchase and sale agreement. 

Usually, the drafting of the agreement starts while the buyer and seller are doing due diligence. As attorneys, we use the details we find out in due diligence to craft the agreement terms. For example, if there are a lot of outstanding accounts receivable, we may put in a provision about who has to collect it and for how long. Or, if there’s a key employee that the buyer wants to stay, we may put a contingency in place in case that employee quits when they find out the business is getting sold. There are many provisions in this type of agreement – too many to list in this article. So just know that the legal issues covered are VAST. All the moving parts and pieces of a business have to be considered, as well as all past actions of the business that may come back around as problems. 

If I’m representing the seller, I’m looking to make sure that all the “strings” are cut and my client can’t be pulled back in after closing. I’m also looking to make sure that the seller gets paid all the purchase price, that they receive it when they are supposed to receive it, and that they won’t have to pay any of it back to the buyer if problems come up. A seller wants to walk away clean with the money they expect to get.

If I’m representing the buyer, I’m making sure that the seller has disclosed all the facts and there’s nothing hidden. 

I’m also making sure that the seller stays responsible for anything that happened before the closing – allocating the responsibility based on that date as best as I can.

Special Note for Small Businesses:  If a broker used their form contract as the LOI, after due diligence is completed the form contract becomes the binding purchase and sale agreement. We cannot change it at this stage unless the deal is getting renegotiated. Once the terms are agreed upon, they stay unless both parties agree to change them. 

So it’s important to see long-term if you use a form contract in the LOI stage.

Stage 4: Closing

The closing is the actual transfer of ownership. 

It is not very complicated because by this time, there are only a few documents left to sign. Everyone signs the documents, the purchase price gets paid, and it’s done! 

Special Note for Small Businesses:  If a broker’s form contract was used in the LOI stage, the closing stage is much more complicated. The broker’s form contract is usually bare-bones and doesn’t have many details (after all, you don’t know many details at that early stage). In that case, it means that the closing documents have to be much more significant to cover everything. So if it’s slim upfront, it will be fat at the end. There will be many documents to sign at closing, and they need to be carefully reviewed to make sure they include all the necessary provisions.