The following is adapted from “Getting Acquired: How I Built and Sold My SaaS Startup” by Andrew Gazdecki.
Nothing derails an acquisition faster than legal problems. Legal procedures are the most critical aspect of a sale, but they’re often the ugliest as well. Fail to understand the legal process of selling your company, and you might end up with a lower purchase price, or worse:
No sale at all.
If you’re considering selling your startup, let’s make sure you have smooth sale-ing (pardon the pun) and get a fair price for your hard work. As someone who has successfully exited a business more than once, I’ve learned that there are six legal stages to be aware of when selling your startup. Being familiar with them will ensure the best deal possible.
Stage #1: The letter of intent (LOI)
To whom it may concern, I would like to buy your business.
OK, so an LOI isn’t quite that simple, but that’s the gist of it. It’s the first sign of a serious buyer with serious interest. If someone is going to take the time to formulate this letter and get it to you, they’re not just talking the talk.
A well-crafted LOI typically includes:
- Purchase price
- Requirements of due diligence
- Applicable deposit
- Exclusivity period
- Any other relevant terms and conditions depending on the uniqueness of the deal.
While there is plenty of room for negotiation and the nature of an LOI is nonbinding, the exclusivity period does commit you to a period of time when the prospective buyer can look at the ins and outs of your startup. A wise move here is to include a non-disclosure agreement (NDA) just to make sure your data, intellectual property, and other sensitive company information are protected.
Stage #2: Due diligence
This stage is an audit on steroids. The buyer will analyze your financial metrics and projections, technology, staff, liens, debts, creditors and lots more with the precision of a forensic pathologist. It can be a stressful time, but remember the buyer is ensuring there are no nasty surprises after the deal closes.
My best advice here is to lawyer up, unless your business is on the super small side. Look for the best mergers and acquisitions (M&A) attorney you can find and follow their lead. This will speed up the process and avoid costly mistakes.
Stage #3: The purchase agreement
Now, we’re getting somewhere! Sort of.
While the LOI obligates you to nothing of any substance, the purchase agreement is a legally binding document that formalizes the agreement of the sale between you and the buyer.
The biggest thing to remember is to not sign it until your lawyer tells you it’s OK to do so. This is where having a good attorney on your side is a difference maker. Many purchase agreements are hundreds of pages long, and they’re not exactly light reading. You need an expert to pour through all the potential loopholes and various other forms of legalese.
Stage #4: Buyer payment terms
Ideally, a cash sale is quick and easy. But that doesn’t always happen. Often, the buyer will need some sort of financing. When financing is in play, you should get some sort of assurance that the financing will go through before signing the purchase agreement.
Some buyers might also ask for seller financing where you let them pay in installments after a down payment. Obviously, this is riskier than a cash deal. If the buyer defaults, you have to go through the courts to settle up, and who knows what could happen to your business in the meantime.
Stage #5: Local laws
Never underestimate the power of local laws to derail a deal. There will be certain rules to follow before, during and after the sale. Be sure to follow them or local regulators might delay or halt your sale. You might even face financial penalties. Some things to consider:
- Liens: These are debt obligations using your property as collateral. If you can’t settle what’s owed to creditors, inform the buyer of what’s outstanding. Contact your creditors to ensure they’ll offer the same line of credit to the buyer; otherwise, you might have to settle before the exchange of ownership takes place.
- Shareholders: If you have shareholders, you might need their approval before selling the business. You might also need to offer them the chance to sell their shares in advance of the acquisition.
- Taxes: Sales tax, for example, varies from state to state. In some states, you’re responsible for paying sales tax. In others, you’re responsible for collecting sales tax from customers. In either case, ensure nothing is outstanding before exchanging ownership.
That’s only a small sampling of how local details can impede your acquisition’s progress. Once again, this is a good opportunity for your prized attorney to earn their high income. Seek their guidance on ensuring you don’t inadvertently tick off the local authorities.
Stage #6: Transfer of ownership
Take a deep breath at this point because you’re almost there. All that’s left to do is legally hand over your business to the new owner.
Honestly, there’s not much that can go wrong here. Sure, you have some contracts to sign still, but after that, you’re home free. Mostly, this is a mere formality similar to handing over the keys to your old house. Chances are, you’ve poured a lot more sweat equity into this though. If you’ve successfully navigated these six stages, you should be walking away as a much wealthier individual than when you started!
Whereas I have successfully navigated this process more than once, please remember I am not an attorney (wow, those people are important). So the advice here is 100 percent non-legally binding, but it is a solid framework to keep in mind if you’re considering selling your startup.
In the absolute least, this information should prepare you for discussions with your lawyer and other members of your deal team to make preparations a little easier for everybody.
For more on the six stages of selling your startup, Andrew Gazdecki’s book “Getting Acquired” can be purchased via StartupNation.com below.