Navigating the M&A Process: Key Steps to Closing the Sale of Your Business
Key Takeaways:
Closing the sale of your business requires meticulous planning and coordination, including finalizing the Letter of Intent (LOI), managing due diligence, and negotiating the purchase agreement.
M&A advisors play a central role throughout entire process, helping sellers organize documentation, proactively addressing potential red flags, and negotiating key deal terms.
In the closing phase, M&A advisors work to ensure a smooth, timely close by managing key stakeholders and verifying legal and financial conditions. This helps sellers minimize liability and achieve an optimal outcome.
Key Steps to Closing the Sale of Your Business
The closing phase of a business sale is one of the most critical and most often underestimated stages in the M&A process. After months of vetting buyers, initial indications of interest (IOIs), management meetings, intense due diligence, and negotiations, the closing process may seem like the simplest piece of the puzzle. But buyers may try to re-trade the deal or back out prior to close for a number of reasons. Therefore, the process of closing the sale transaction requires just as much attention to detail, strategic planning, and proactive coordination as everything that came before it. An experienced merger and acquisition advisor plays a pivotal role in helping business owners and sellers navigate this final phase and secure a successful outcome.
Below is a comprehensive overview of the key steps in the closing process, strategies for handling final negotiations, and tips for ensuring a seamless transaction. At this point, you have already marketed your business with the help of an M&A advisor, received initial indications of interest and selected a subset of potential buyers to complete diligence, met with prospective buyers, facilitated preliminary due diligence and hopefully received multiple Letters of Intent (LOI) from which to select a winning bidder and begin the closing process.
Structuring and Negotiating the Letter of Intent (LOI)
The LOI lays the groundwork for the definitive transaction documentation. Prepared by the prospective buyer and typically non-binding, the LOI outlines critical deal terms such as purchase price, transaction structure (e.g., asset or stock sale), transaction consideration (cash, stock, sellers note, earn-out, etc.), financing (including any contingencies), exclusivity period, timing to close, conditions to closing, among other material terms.
M&A advisors, along with M&A attorneys, help negotiate the LOI with prospective buyers. The LOI is negotiated during a period of maximum leverage for a seller because there are typically multiple buyers competing to acquire the company and a period exclusivity to finalize diligence and negotiate definitive documentation. It is highly recommended to negotiate critical seller priorities and deal terms during this stage to minimize ambiguity, prevent costly renegotiation, and set the deal on a firm trajectory.
Managing the M&A Due Diligence Process
Due diligence is an in-depth review of the target company to ensure informed decision-making and appropriate valuation by the prospective buyer. During due diligence, the buyer conducts a thorough examination of the target company's financial, legal, operational, people, regulatory, customer / market, and strategic condition. Your M&A advisor and legal counsel will advise you on the appropriate timing to release information during the process to protect competitive secrets and to vet buyers interest.
Types of Due Diligence
Financial due diligence: Financial due diligence verifies the accuracy of a company's financials as presented in the marketing materials shared with the prospective buyers, whether a Confidential Information Memorandum (CIM) or Confidential Information Presentation (CIP). It provides a comprehensive financial analysis, including historical performance, working capital, cost structures, internal controls, and debt obligations. Financial due diligence can include a quality of earnings (QofE) report to analyze the sustainability, accuracy, and underlying drivers of a company’s earnings, particularly EBITDA, as well as to identify any adjustments or anomalies that may not be apparent from standard financial statements.
Commercial due diligence (CDD): Commercial due diligence evaluates the market position, competitive environment, customer base, growth potential, and strategic risks of a target company. It is helps the buyer understand whether the underlying assumptions driving the sellers business model are sustainable and supportable in the future.
Operational due diligence: Evaluates a company’s operations to verify operational costs, measure efficiency, and assess the implications for future expansion. This may include reviewing facilities, workforce structure, HR policies, compensation, employment contracts, and any existing or potential labor disputes that could impact the business. Buyers may leverage outside experts to complete the various components of operational due diligence.
Legal & tax due diligence: Reviews legal framework and tax jurisdictions, including licenses, regulatory, material contracts, and any pending legal or tax liabilities.
Intellectual property (IP) due diligence: assesses the value, ownership, and legal standing of a company's IP assets, such as patents, trademarks, or IP licensing deals. This process helps identify risks, confirm rights, and ensure the IP supports the strategic goals of the transaction.
Merger and acquisition advisors play a central role in preparing the required diligence materials, organizing a virtual data room to give access to prospective buyers, anticipating potential red flags, and maintaining forward momentum. Proper preparation instills buyer confidence and reduces the likelihood of delays or price reductions due to diligence issues that had not been previously disclosed. An experienced M&A advisor will work closely with you on strategies to address these concerns proactively.
Negotiating the Purchase Agreement
As due diligence nears completion, the buyer’s legal counsel will typically draft the Purchase Agreement, which becomes the legally binding framework of the transaction. It covers representations and warranties, indemnifications, payment structure, and conditions to closing.
Key Terms and Components of a Purchase Agreement
Description of the Transaction: Clearly defines whether the deal is an asset sale or a stock sale. Specifies exactly what is included or excluded from the transaction.
Sale Terms and Pricing Structure: Outlines the purchase price, payment structure (cash, stock, seller notes, earn-outs, etc.), and any conditions that could trigger price adjustments.
Purchase Price Adjustments: To protect against fluctuations or unexpected issues, purchase agreements often include mechanisms for purchase price adjustments. These can involve:
Working Capital Adjustments: These adjustments ensure the buyer receives the agreed level of working capital upon closing by incorporating a post-closing working capital adjustment. If more working capital is delivered at closing that will result in a purchase price increase. If less working capital is delivered at closing, it will result in a purchase price decrease.
Escrow Arrangements: A portion of the purchase price may be held in escrow for a period after closing to cover potential post-closing liabilities or adjustments.
These arrangements give buyers added security by holding back funds to cover unforeseen issues that could impact business value.
Representations and Warranties: Representations and warranties are factual statements each party makes to reassure the other about various aspects of the business and the transaction:
Seller’s Representations and Warranties: These typically cover the company’s financials, assets, liabilities, operations, legal compliance, intellectual property, and more. They confirm that the business is as represented, minimizing risks for the buyer.
Buyer’s Representations and Warranties: These usually cover the buyer’s ability to complete the transaction, their financing arrangements, and their legal standing.
These assurances help both sides verify the legitimacy and soundness of the transaction and set the foundation for potential recourse if any statements prove false.
Indemnification: Indemnification provisions outline the circumstances under which one party must compensate the other if certain issues arise post-closing. For example:
Breach of Representations and Warranties: If any representation or warranty proves inaccurate, the responsible party might have to cover the resulting damages.
Specific Liabilities: Certain known risks, like pending litigation or tax obligations, might be indemnified to protect the buyer.
Your M&A advisor and legal counsel will typically negotiate specific points, such as:
Narrowing the scope of indemnifiable breaches to limit your exposure
Capping the liability to a reasonable percentage of the purchase price
Excluding certain types of damages to limit your financial risk
Increasingly, buyers and sellers use representations & warranties (R&W) insurance, which is a specialized insurance policy, to protect from financial losses arising from breaches of the representations and warranties made in the purchase agreement.
Conditions to Closing: A buyer may include certain conditions the seller must fulfill for the deal to close. These could include regulatory approvals, executing non-compete clauses for key employees, receipt of third-party consents, completion of customer calls, or asset transfers.
Termination Rights: Termination rights specify the conditions under which either party can terminate the agreement. These might include:
Mutual Agreement: If both parties decide not to proceed, they can terminate by mutual consent.
Failure to Meet Conditions: If one party fails to meet a closing condition or violates a key term, the other party may have grounds for termination.
Outside Date: Often, there’s a “drop-dead” date by which the transaction must close, or either party can walk away without penalty.
Termination rights protect both parties by setting clear guidelines for ending the transaction if necessary.
Disclosure Schedules: Disclosure schedules are detailed exhibits that provide information relevant to the transaction, including: list of assets and liabilities, details about employees, their roles, and benefits, details on third-party agreements, leases, customer contracts, and supply agreements, among many others.
As a seller, it’s important to note that the terms in the Purchase Agreement are negotiable. While the buyer may propose the initial draft, your M&A advisor and legal counsel will work to negotiate more favorable terms. It should be a collaborative approach to ensure that the final purchase agreement aligns with the seller’s strategic and financial objectives.
A Merger & Acquisition Advisor can Guide You to a Successful Closing
Preparation for Closing
In the weeks leading up to closing, the M&A advisory team coordinates across key stakeholders, including the buyer’s team, legal counsel, accountants, and any relevant third parties to ensure a timely and frictionless transaction. Final steps include:
Signing of the final Purchase Agreement and ancillary documents
Transfer of funds
Legal transfer of shares or assets
Submission of final disclosure schedules
If managed properly from both sides, there shouldn’t be any surprises by the time you reach the closing process. The M&A advisor oversees the closing timeline and ensures that all documentation, funds, and conditions are completed in the proper sequence.
Selling a business is a complex, high-stakes process that extends far beyond finding the right buyer. An experienced M&A advisor plays a critical role in navigating every stage from managing due diligence and structuring the deal to negotiating favorable terms in the LOI and purchase agreement. They help sellers anticipate and mitigate risks, structure deals that align with their goals, and avoid costly surprises during closing. With the right M&A advisor, sellers are better positioned to secure stronger outcomes, minimize liabilities, and ensure a smooth, successful transaction closing.
Keene Advisors is a Full-Service Investment Banking Advisory firm. Our team has advised on over $40 billion in successful mergers and acquisitions, capital raising, and restructuring advisory transactions. We are dedicated to transparent communication and seamless guidance throughout every stage of the M&A process, always aiming to align short-term needs with long-term goals.
Contact us today with your inquiries and to learn more about how we can help you achieve a successful sale.
Disclaimer: This commentary is intended for general informational purposes only. Keene Advisors does not render or offer to render personalized financial, investment, tax, legal or accounting advice through this report. The information provided herein is not directed at any investor or category of investors and is provided solely as general information. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action. Keene Advisors does not provide securities related services or recommendations to retail investors. Nothing in this report should be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product.