A business acquisition can be accomplished in several ways. The most common ways are an equity transaction, asset liability transaction and legal merger. The manner in which a business acquisition takes place determines the steps to be taken in the acquisition process.
In this blog, I describe in chronological order the ten stages of a stock transaction.
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1. Preparing business acquisition
An acquisition process begins with the preparation phase. The seller prepares the target company (the company being bought or sold) for a business acquisition by updating its records and contractual housekeeping, paying off debts and handling any legal disputes. This makes the target company more attractive to potential buyers.
2. Indicative valuation of shares.
The seller will then perform an indicative valuation of the shares in the target company. This valuation usually takes place by means of a so-called discounted cash flow. With a discounted cash flow method, the value is calculated by looking at future cash flows that can be earned with the target company. Then the incoming cash flows are offset against the outgoing cash flows. The result of this calculation is called the free cash flow. The free cash flow is then discounted using the Weighted Average Cost of Capital. The resulting value is the (minimum) value of the target company. Selling the target company only makes sense for the seller if a purchase price above this value can be received. Therefore, the indicative valuation serves primarily as a lower limit for the price in a sale.
3. Teaser, information memorandum and data room
To inform prospective buyers, a teaser and an information memorandum are prepared and a data room is set up. A teaser contains global information about the target company. This is usually just enough to interest a potential buyer in the information memorandum. The information memorandum is provided after step 4 (confidentiality) and contains extensive information about the target company, such as historically realized results, expected future results, key stakeholders (suppliers, employees and customers) and general information about the board and management of the target company. Finally, the seller will need to make preliminary preparations to set up a data room. After all, a potential buyer will want to conduct due diligence (step 6) to verify the accuracy of the figures and information presented.
4. Secrecy
Once the seller has found one or more potential buyer(s), the parties will sign a confidentiality agreement. Only after signing the confidentiality agreement will the seller send the information memorandum to the buyer. In this way, the seller limits the risk of disclosure of the enhanced (business-sensitive) information. From the seller’s perspective, it is advisable to include a penalty clause in the non-disclosure agreement that is immediately forfeited by the buyer in case of breach.
5. Letter of Intent
When the buyer has been able to conduct a (limited) investigation into the essentials of the target company and there is mutual interest, the parties will sign a letter of intent. In the letter of intent, the parties agree in outline the conditions under which they are willing to realize the acquisition, such as:
- the contours of an acquisition;
- the indicative purchase price;
- financing the purchase price;
- the warranties and indemnities to be provided;
- the timeline for the acquisition;
- operations during the acquisition process;
- The manner in which due diligence will be conducted;
- the conditions that must be met to complete the acquisition;
(additional) confidentiality; - the conditions under which the parties may suspend or discontinue further discussion;
exclusivity.
6. Due diligence (book examination).
Once the letter of intent is signed, due diligence can begin. The primary purpose of this review is to reduce the risks to the buyer in the acquisition. In that context, it is relevant that the seller has a duty of disclosure with respect to facts and circumstances that may be relevant to the buyer for entering into the purchase agreement. To give effect to this, the seller sets up a virtual data room in which all essential information about the target company can be found. The buyer, on the other hand, has a duty to investigate. The buyer shall give effect to this by having the documents in the data room analyzed by lawyers, accountants and/or tax specialists. The consultants report their findings in a due diligence report. The outcome of this investigation is the basis for the buyer to determine the final purchase price and the warranties and indemnities to be stipulated. If the outcome of this report is satisfactory to the buyer, the next stage follows: negotiations and preparation of the legal documents.
7. Negotiations and legal documentation
If, after due diligence, the buyer is still interested in purchasing the target company, the buyer will draw up (or have drawn up) a draft purchase agreement – also known as a share purchase agreement. In this agreement, the parties agree, among other things, on the purchase of the target company, the (financing of the) purchase price, indemnities, guarantees, liabilities and conditions precedent. The seller then reviews the purchase agreement and will negotiate it with the buyer. In addition to the purchase agreement, additional legal documents may be required, such as shareholder or board resolutions, money loan agreements or other agreements.
8. Signing purchase agreement (signing).
When the parties have agreed on the terms of the transaction, the buyer and seller sign the purchase agreement (also called signing). In the purchase agreement, the parties can agree that from the moment of signing, the buyer becomes the economic owner of the target company.
9. Period between signing and closing
Between the time of signing the purchase agreement and legal transfer of title (also known as closing), the buyer has time to ensure that the conditions precedent he has stipulated are fulfilled. This means that the contract is not formed until those conditions precedent are met. For example, the buyer may have stipulated a condition precedent to obtaining the necessary competition and/or corporate approvals. Also, the buyer will often have stipulated a condition precedent for obtaining financing.
10. Legal transfer of the target company (closing).
Once the buyer has fulfilled the conditions precedent, the legal transfer of ownership can take place. During closing, all documents are signed, the shares of the target company are transferred to the buyer, and the purchase price is paid to the seller. If the parties have agreed on an earn-out, the situation is different. In fact, with an earn-out, the purchase price is paid in parts, depending on the operating result achieved in the future.
Need help?
As the above description shows, a business acquisition is generally a complex and time-consuming affair. Depending on the condition of the target company, the wishes of the parties and the financing required, the acquisition process can take months to years. It is therefore understandable that an acquisition process raises the necessary questions.
