Buying/Selling A Business In Washington State: A Process
Most closely held business owners are not familiar with the process associated with buying or selling a business. The process is comprised of four general steps: conversation, letter of intent, definitive documentation and closing.
Conversation
The first step in the process is the initial conversation between the buyer and the seller. A simple conversation can spark interest and help both sides become aware of the potential for a deal. Both sides are then responsible for acquiring the information necessary to understanding the business being bought or sold. The buyer needs to know what they are purchasing, and the seller needs to know what they are selling. Valuations, a background of the business, and the business’s current financial situation form several aspects of the initial due diligence. A confidentiality agreement protecting the information both sides divulge is essential at this stage.
Letter of Intent
A letter of intent follows the initial conversation prompting the next step in the process. The letter of intent, typically drafted by the buyer, indicates to the seller the buyer’s intent to purchase while also including some general terms. Both buyer and seller need to know if they are on the same page regarding important details of the transaction, such as structure (i.e. asset vs. equity) and price terms. Business transactions carry significant expenses and it is important to know if a deal is possible before the significant expense associated with drafting definitive documentation is undertaken. Vital elements of the deal, like the structure and price, are included within the letter of intent while the nonbinding nature of the agreement leaves room for other details to be negotiated later.
Definitive Documentation
The letter of intent provides the framework for further substantive negotiations culminating in definitive documentation. All aspects of the deal, including the price, structure, indemnification, timing, and employment details, are included in a final, legally binding agreement. At this point, all parties involved complete all conditions associated with the transaction and their due diligence.
Closing
Closing occurs once the parties exchange the transfer documents and money. In recent history, technology has altered the closing “norms”. While the traditional closing day still occurs—both sides meet at a central location to sign documents and exchange assets and money—it now occurs rarely given today’s technology. Many lawyers prefer to simply exchange signed documents electronically to more efficiently close deals. Buyers and sellers may also choose a formal closing through escrow. With escrow, signed documents and assets are sent to a third party and the deal closes once escrow receives all contractually obligated documents and assets from all involved parties.
At Beresford Booth, our lawyers are experienced in every step of a transaction. We would be pleased to work with you, whether you are buying or selling a business.