Buyers and sellers of companies find one another through a variety of means. Frequently, executives at companies already know many of the businesses in the industry and can identify candidates with a few phone calls. Investment bankers and business brokers often are employed to find candidates. And sometimes a merger partner is identified when a business receives an unsolicited phone call from the prospective partner.
In the initial discussions, merger partners discuss overall interest in buying or selling, the strategic and technological fit, price, and a few other high-level matters. Basic information may be shared, such as financial statements, bookings, and app user adoption rates. Prudent businesses negotiate and execute nondisclosure agreements before sharing any confidential information.
If the interest of the parties is high enough to proceed, a written term sheet or letter of intent is usually the next step, along with the sharing of more information. The letter of intent will outline the key terms of the deal and frequently is not binding on the parties (at least for certain business terms).
In most cases, the buyer also undertakes a comprehensive due diligence investigation of the seller. If, during this investigation, no information is uncovered that impedes the deal or causes either party to walk away, the parties proceed to negotiate and sign a definitive acquisition agreement. If there are ancillary agreements that are part of the deal (employment agreements, escrow agreements, etc.), these are frequently negotiated and drafted as well.
Once the acquisition agreement is executed, the deal is not yet completed in many cases. Acquisition agreements frequently have delayed closings built into the structure of the deal. This delay is necessary to ensure certain conditions are satisfied prior to the transfer of the seller’s business. These conditions include obtaining approvals from the parties’ shareholders, government agencies, and certain parties with whom the buyer or seller have contracted. When these conditions are satisfied, the closing of the acquisition can occur. At the closing, the buyer delivers the consideration, any required ancillary agreements are signed, and legal title to the seller’s business passes to the buyer.
Finally, the parties integrate their companies to achieve the business purpose for the deal, taking into account their respective human resources, IT infrastructures, sales channels, accounting and financial systems, lines of businesses, and so on.
Other posts in this series (more to come):
Mergers & Acquisitions Primer | Part 1: Introduction
Mergers & Acquisitions Primer | Part 3: Nondisclosure Agreement
