What Is The Process For Buying Or Selling A Minnesota Business?

There are generally five steps involved in the process of buying or selling a Minnesota business.

•      Initial negotiation and offer
•      Letter of intent and nondisclosure agreement
•      Due diligence
•      Document preparation
•      Closing

These steps give shape to the transaction, much like the steps of a dance define its form. However, it is important to remember that, as with a dance, your perspective of the transaction will change with your role. In many ways, the seller is like the lead dance partner, and the buyer is like the follower.

Initial Negotiation And Offer

At the beginning of the process, the seller likely has an idea of what they want. In some respects, business sales are like home sales. A home seller might base the value of their house on a number of factors, such as its condition, what they paid for it, the neighborhood and the values of other homes in the neighborhood. Then they’ll list it on the market, and potential buyers will evaluate those factors from their perspectives and potentially make an offer.

The important thing is that the initial negotiation is a starting point, much like the initial listing price for a home. That figure may change, and other factors may come into play, but that starting point still matters.

Letter Of Intent And Nondisclosure Agreement

Once the seller and buyer have had a chance to discuss the initial terms and the buyer decides they’re interested in further exploring the transaction, the buyer will prepare a letter of intent.

The letter of intent is important in the sense that it’s like reserving all the slots on your partner’s dance card. It’s not usually super binding. The letter will typically provide explicit language for renegotiating the terms of the agreement, if need be, based on the findings from due diligence. But it provides security for both partners in this dance. Essentially, it’s an agreement between the two that they’re only going to dance with each other until the end of the song.

Without a letter of intent, there’s nothing to keep the seller from negotiating with other potential buyers. And for the seller, the letter of intent is a clear sign that the buyer is earnest. The buyer is committed to the process and isn’t just tire kicking. And while both sides are using the letter of intent to protect their interests in the process, they’ll typically sign a nondisclosure agreement to ensure that they protect the business secrets and information they’ll uncover during due diligence.

Due Diligence

For some businesses, due diligence is relatively easy and breezy. For others, it’s like eating an elephant. It can be complicated and time-consuming and can drive up the cost of the transaction. It really depends on which pieces of information both sides need to review.

All businesses will have financials to review during due diligence. The financial performance of the business is really a baseline, though, not a complete review.

There are many other things that you might also include in due diligence, depending on the business, industry and circumstances:

•      Company policies and procedures
•      Customer metrics
•      Customer performance
•      Customer demographics
•      Overall marketing plan
•      Existing contracts with vendors, customers and third parties
•      Existing lawsuits
•      Potential lawsuits
•      Staffing and employees
•      Intellectual property
•      Real property

In short, due diligence can, and typically should, explore every little aspect of the business. As a result, you can see how a manufacturing business with trade secrets and multiple facilities would require a different level of due diligence than a mom-and-pop dry cleaner.

Importantly, the factors that you reveal or explore during due diligence are the factors that determine what a buyer is ultimately willing to offer. These factors become the basis for the seller’s statement about the business's performance, and they’ll stand much like a home seller’s disclosure. Accordingly, any failure to disclose material information can lead to potential litigation in the future.

Due diligence is important on the seller’s side because they need to make sure they’re presenting accurate information. They are testifying to the state of the business and need to protect themselves from future lawsuits. On the buyer’s side, due diligence gives the buyer a chance to see the state of the business, and it also gives the buyer a chance to see where they might find opportunities to improve the business. Few people who buy a business want to merely maintain the status quo. They typically want to improve and grow the business, to up-level it, and thorough due diligence can play an important part in that effort.

Document Preparation

Document preparation often happens throughout due diligence. While the buyer and seller are reviewing the different aspects of the business, their attorneys will be drafting the purchase agreement, preparing financing documents and lining up all the necessary documents for closing. They will then need to review and finalize these documents, potentially updating them to account for any revisions to the terms, after the due diligence is complete.

Closing

Once we get to the point where both sides have an agreement and the purchase is happening, we head to the closing. At its core, closing is where the money comes to the table and actual ownership changes hands, but the shape of it can vary, again, depending on the factors involved.

If there’s real estate, closing will need to cover the real estate processes. They’ll need to address the bill of sale as well as any assignments of contracts and intellectual property. They’ll transfer the business registration, and at the end of the closing, the sale and purchase of the business will be complete.

The Process Typically Takes Several Months

Altogether, the length of the process will vary, but it typically takes several months for a standard business. Sometimes, businesses will approach our firm to get things done “fast-fast.” The seller and buyer were both ready, had agreed to the terms and had some reason to move quickly, and we were able to get things done “fast-fast.” But that’s uncommon. Sometimes, very complex business sales can take years, but, for the most part, it’s an iterative process that takes several months.

How An Attorney Can Help

Some people have this idea that there’s a set of documents “out there” that they can just find and use to complete their transactions on their own. What those people don’t realize is that these transactions and their supporting documents are all bespoke. All aspects of them can be, and usually are, negotiated.

Furthermore, it’s important to understand that the terms of these transactions can either favor one side greatly or be quite fair and equitable on both sides. Throughout this process, the attorneys involved are looking at everything in terms of what’s best for their clients. If only the seller has an attorney, the buyer will be at a real disadvantage. If only the buyer has an attorney, then the seller will be at a disadvantage. These attorneys aren’t just writing up documents. They’re bringing the wealth and depth of their knowledge and experience to the table, in support of their clients’ interests, and some people don’t realize that until it’s already too late.