The Complete Business Acquisition Process (Explained Step-by-Step)

Buying a business and selling a business are often treated like two completely different processes, but in reality there are two sides of the exact same transaction, and every step along the way affects both parties at the same time, but in different ways. What I want to do in this video is something a little different. Instead of only talking to buyers or only talking to sellers, I'm going to walk you through the entire process from both sides of the table, step by step, showing you what buyers should be thinking and what sellers should be doing at each stage of the deal. If you understand how the other side is evaluating or thinking about the transaction, you're far more likely to negotiate better terms, avoid surprises, and get a successful closing I'm Marc J. Kohler, CPA attorney and small business advocate, and today I'm going to break down the eight key steps involved in buying or selling a business from the very first conversation on all the way through closing and the critical transition period afterward. Let's break it down the pre Offer Preparation this is where the buyer and seller are doing very different work, but both are setting the tone for the entire deal. First, the buyer side this is about clarity. Before emotion takes over, you should be asking why am I buying a business rather than just starting one? Am I buying a job or an asset or stream of income? How much cash do I really have available? What's my financing strategy? What legal structure makes sense for the acquisition? All of these questions and more help the buyer gain perspective. And buyers who skip this step tend to overpay, underestimate the risk, or buy businesses that don't actually fit their goals. From the seller side, there's actually a lot more work in this stage. This is where the value is either created or destroyed before you ever go to market. Key seller action items include cleaning up and normalizing the books, getting EBITDA dialed in. That's earnings before interest, taxes, depreciation, and amortization. This process of dialing in this critical number includes adding expenses back into the books and taking out expenses that shouldn't be there. For example, personal expenses that you might be using for a tax strategy but a new buyer is not going to want to see. One of the key steps is reducing dependence on the owner. A buyer doesn't want to buy a business that's dependent on you, which means you want to be systemizing product or service delivery and eliminating reliance on on one customer or one marketing channel, creating recurring or predictable revenue. Oh my gosh. Absolutely critical. As a seller, you want to be creating this perfect model that a buyer will be interested in and they want to see two to three years of financial track record with normalized financials so they can estimate growth rates, profit rates, all sorts of information that they need from those financials. You got to have a track record. So the sooner you decide you want to sell and can start working on these issues, the better. The buyer takeaway is a lot simpler. You're preparing yourself to go look and not buy the first thing you see and to understand why you're buying this business and what you want to get out of the transaction three, five years from now or even further, understand the why. The seller takeaway is of course preparation. And preparation is going to determine the value long before negotiations start. Second step the NDA and pre Offer conversations. The NDA stands for Non Disclosure Agreement. This is what the buyer is going to sign and should have readily available to give a seller to let them know you're safe to talk to me. I don't want to steal your secrets, your strategies, your systems, your people. I just want to understand what you have and start doing some initial investigation. In fact, this is really the first real interaction and both sides are quietly judging each other. From the buyer side, this is about credibility. You should be clearly explaining your why, your objectives, showing you're serious, not just curious, asking smart, high level questions and of course having that NDA ready to go. From the seller side, this is about control and positioning. You should have a clear and confident story yourself and not asking for a certain price too firmly. Right now let's maybe be talking about a range in pricing and sharing enough to get your buyer interested and avoid sounding rushed or desperate. I hate to say it, but this is about playing poker and you don't want to show all your cards at first as to what you really want financially out of the transaction, but starting kind of a dance, a date. This is essentially going out for drinks and you're just talking and getting to know each other and not trying to knit nailed down a firm price or procedure yet, but kind of letting know why you're at the table. So the buyer takeaway. First impressions matter signal competence early and the ability to follow through with the transaction financially if it goes to that stage. The seller takeaway is not looking desperate. You're willing to sell, but you're waiting for the right buyer and that confidence is going to create leverage later so that you're not just ready to sign anything because you're so desperate to sell. Now. Step three and step four can be a little gray. A lot of times we get to this letter of intent loi too quickly. Sometimes we're in this kind of dance and dating stage a little too long. But the point is here, in the initial disclosure and due diligence stage, we're not going hard at seeing everything the seller has to offer, but we're trying to get enough information as a buyer to write up an offer to get that letter of intent signed. And so as a seller, you got to be willing to share some information, but you also want to kind of get a letter of intent before you go hard and start spending a lot of time in that due diligence phase. So this is where trust starts to be tested. From the seller side, you're opening up the books. This usually is going to include tax returns, financial statements, maybe a list of assets and liabilities, some basic employee information, some organizational charts. I don't know if we're going to get into leases and contracts and certainly not bank statements. And the real nitty gritty at this point, we just want to give enough information for the seller to put together an offer. But organization matters here. Sloppy disclosures, looking disorganized is not going to serve you whatsoever. From the buyer side, this is about really reading into what's going on. You're an investigator at this point. You're looking for patterns, but not perfection. You should be asking again about the why and reconciling the numbers from the tax return to the normalized books, looking for revenue numbers, are they growing, are they consistent, are expenses reasonable? And really try to look under the hood now. You're not doing a full investigation yet, but enough to feel like, okay, I could sign a non binding letter of intent. That's where we're going next. And so there's this dance of just shooting, showing enough to really get to a dollar figure that might work. And then we're going to get going further. The buyer takeaway is look for consistency and transparency and a story of why the seller is even there. Don't just look for growth and profit. You need to understand what's behind the seller's motives. Here. The seller takeaway is also transparency and understanding. Who is this buyer? Do they really have the wherewithal to pull off this transaction? And are they someone I want to be working with? Step four is now the letter of intent or offer. And this is where the deal becomes real. From the buyer side, you're going to now know the EBITDA and what multiple the buyer's looking for. And the buyer may have even said, this is my asking price. Fine. You might Come in right at that, a little below it, above it, because you might want to offer more, because you're going to ask for more favorable terms. You might come in lower because you're going to offer cash. So if the seller is giving you an asking price, great, you can kind of start from there. But if they haven't, you're going to have to set that stage. And so you might propose an industry based multiple. Start asking for terms that you're going to want, seller financing earnouts, holdbacks or escrows. You want to start laying out what you want that transaction to look like from the seller side. You're excited to see what this buyer is going to offer you. And so you're going to want to see what they're willing to do. And if you've given them a ballpark or an asking price, you're going to sit back and see what they're really willing to do. I want my sellers to really understand here at this point, this is a non binding letter of intent. You're going to get into some serious due diligence and eventually the legal documents. And if you don't like what the buyer is offering at the end of the day, you can still walk away. But we're going to be setting timelines as well. Because as a seller, when you sign that letter of intent, you can't start talking to other buyers. You're going to have a time frame where you have to shut the doors and deal with this buyer until you're ready to say, yes, let's move forward or I'm done. I want to look at other potential buyers. So understanding how long you're willing to take for this process with each potential suitor is something important to think about. How long do you want to pull your business offer out of the market to deal with a buyer? So look at the timing on the LOI and just realize it's non binding. The buyer takeaway is nail down the terms you want now because it's going to be really hard to shift off the LOI later. When you get into the legal docs, the seller takeaway is don't fixate on the headline number alone. There's a lot of due diligence to be done and you can still back out or change the price if you're not really happy with what this buyer starts to offer when it comes to the terms. So be okay with the purchase price, but also start realizing that the terms are going to be a huge negotiating factor throughout the process and through the legal documentation. Step Five, confirmatory due diligence. This is the biggest pain in the butt, frankly, for both sides because this is where all the heavy lifting really is. And I've seen this stage take one month and I've seen it take nine months. Sometimes the deals fall apart in this stage. One reason being is the buyer got the information and they don't like what they saw. Also, the seller can get into deal fatigue and be like, I am sick and tired of providing information. I'm out. And so that's going to be kind of the tug of war, is making sure that both parties get what they want and it doesn't take forever. This is really truly the most stressful phase for both sides. From the buyer side, this is verification mode and going deep on all those initial disclosures. You're going to do a deep dive into financials and banking records and revenue numbers and customer data. You're going to review systems and operations, employees, the org chart. You're going to be looking at asset lists, liability lists, confirming contracts and lease agreements. Anything and everything is available for you to look at to make sure you are going to not get ripped off and you made a good decision. From the seller side. This is about not getting deal fatigue and knowing that this is normal. And when you get to the next buyer, if you don't like this one, you're going to have to do the same damn thing. So provide what's requested. You should not be shocked about this and you should be trying to stay organized, keeping your story consistent and avoid surprising your buyer. The buyer takeaway is trust, but verify everything. The seller takeaway is do not act desperate. Be super cooperative and helpful, giving them all the information they need, sticking to the timelines and the loi and let them know they can't take nine months to analyze everything. Which way till Sunday, say I've given you the information. Do your analysis. Are you in or you're out? And be prepared to move on. If it doesn't come together in a timely manner, it's okay. There will be another buyer. This is where I want to tell you have the mindset that you are not married to this deal. And I know some of you have been dying to sell your business and you're so excited to move on. And a lot of times sellers, soon as they get that loi, they've already sold the business, they've already moved on emotionally. Do not do that because it takes away all your bargaining power. If the buyer sees that you've already made up your mind that you're going to sell because now they can throw in little things and they know you're going to take it because you're ready to run out the door. So be cool, play poker. Stage six legal documents. Assuming we get through due diligence, buyer is still happy. A lot of the terms have been fleshed out. Seller has not gotten deal fatigue. The parties say, let's do it. And this is where details replace handshakes from both sides. Lawyers take over, set budgets be involved. So set deadlines because lawyers, they'll take, some of them will take as much rope as you'll give them. Now common documents are going to be an asset purchase agreement or a stock purchase agreement. There's going to be a lot of competing issues there when it comes to tax planning. There's going to be exhibits and schedules and non competes notes, financing. There's going to be consulting agreements and earn out agreements, IP agreements, leases, licensing agreements, employee transition documents. Expect it all and that's good. You want to make sure that the documentation is strong and solid. You cannot believe the stories I have of people walking into my office going, yeah, I got screwed over by this buyer or I got screwed over by the seller. And I'll be like, well, show me the agreement. I've had people literally show me a page with half a page of writing with like two paragraphs. And that was the whole deal. And they were trying to save money on lawyers and guess what? They got a lawsuit. So pony up to do it right, but set boundaries. Now the buyer and seller takeaway is the same in this stage and that is bad documents create a bad deal. You can have a great deal, but a bad agreement could blow the whole thing up. And both parties are going to end up in a lawsuit. Both of you respect the relationship with your lawyer. Be involved, get to the bottom of the documents as quickly as you can and make sure you understand every sentence. Stage seven. Now, I almost didn't make this one of the stages because it's pretty straightforward. Everybody's happy with the due diligence. We've got all the legal documents down. Now it's time to close. This is an important stage in the sense that you've got to make sure it's done right because timing is everything. Are you going to sign the documents on a Friday and take over the business on a Monday? When do you release funds? When do you record titles? When do you talk about it with the employees? When do you disclose this to the customers or the public? All of these timing issues are what closing is all about. It's when the ownership officially changes hands, but it's also where the world discovers what just happened. And the closing is is not just a formality. It includes signing all the final documents, transferring those funds, receiving those funds, assigning ownership, shifting the legal responsibility. And if there's kind of a window in there where the buyer has to provide the funds, what responsibility does the seller have to run the business? How much money do they leave in the bank account? What is the balance of any liabilities the buyer might be assuming? Are they assuming any liabilities at all? A lot of moving parts. Many deals use an escrow or a law firm to receive money and pass it along and make sure everything's signed. Those are sometimes called a closing attorney. Whether you use that or an escrow, just use someone in the middle. The buyer and seller should not be trying to do this in a parking lot at Denny's right now. The buyer takeaway, don't rush the finish line. Make sure you understand all the documents and when you deliver funds and when you receive the documents. The seller takeaway again is making sure when you get that money and what you're supposed to do up until the day of closing and handing over the keys. Step eight and the final step of the process is post closing and the first hundred days. This is where the deal succeeds or fails a lot of times. From the buyer side, execution matters. The first 90 to 100 days focus on employee retention, customer confidence, system integration, learning the real business and having the seller take you on their farewell tour and your introduction tour. The seller should be very involved in that process and that should be a part of those agreements that you're going to require the seller to do. A lot of handshakes and kissing babies that first hundred days helping you in that transition. This is where the earn out could be involved. Meaning you're going to pay them this last one final piece via 1099 for helping with some training, helping with some introductions and the final party and the welcome party and all this stuff. That's what you should be asking for as a buyer. And the seller will get paid for that. Seller's not going to do that for free, per se. It should just be a part of the agreements and usually part of that earn out from the seller side. Expect this. Don't think that you're just going to be able to get your paycheck and run out the door. Especially if you are carrying a note or any sort of financing for the buyer. You're going to want to make sure they succeed a lot of time. Buyer is going to ask for you to carry some paper or be a part of the financing so that it ensures that you're going to be there as a relationship handcuff. They're going to want to make sure that you are really tied to this deal for just a little bit longer. Maybe it's six months, but maybe it's a year so that you help them succeed as the buyer. Buyer takeaway. Have a clear plan, write it down. Have those expectations. Have that all written out in the legal documents as to what you're expecting from the seller. That first hundred days, you can't just assume the seller's going to be a great guy or a great gal and help you succeed. You got to be very clear on what you want and those expectations. The seller takeaway. You got to be clear about what you're willing to do and make sure that you're not agreeing to something you don't want to be doing and that you're compensated for it. Trust me, the buyer is going to want to take as much as you're willing to give. So be clear about your boundaries and what your compensation is for something that you really think is beyond the value of the business. Remember that the business has a value. They're buying that. Are they buying you afterwards? Yeah, I think that's fair. But again, there's going to be boundaries and you're going to want to have that in writing before you sign those legal documents. Then make sure you perform because you not performing during that first hundred days might threaten that earn out and what they're supposed to pay. In summary, buying or selling a business is certainly a complex process. And most of the mistakes I see don't come from bad intentions. They come from rushing and misunderstandings and not having proper expectations regarding the process or even failing to appreciate what the other side of the deal is actually thinking or wanting. When you understand how buyers and sellers evaluate each step and operate and think through each step, you negotiate better. You spot problems earlier on and dramatically increase the odds of a successful transaction. If you're thinking about buying or selling a business and want a second opinion before making a major movement or that lawyer support that you're going to need through the whole process. Please reach out to my team at KQS lawyers and have an interview. Have an understanding of what we offer in our fixed pricing for different deal prices so that you can know what to budget into the process and we can be there all the way along through the process helping you with the NDA. The loi, the legal documents and any earn out or agreements that need to be drafted after. This is something we regularly do. You want to find a law firm that does this on a regular basis and helps Main street business owners, not just the big M and A, the mergers and acquisition lawyers in big cities that charge hundreds of thousands of dollars. We're nowhere near that. But you need to have that lawyer you want to have a relationship with through the whole process. So make sure you give our law office a call to interview them to see if we're one of the people you want on your team. And if this video was helpful, do me a favor, hit the like button, subscribe to the channel and turn on notifications so you don't miss future videos. Thanks for watching. I'm Mark J. Kohler and I'll see you in the next video.