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The majority of startups will find their best exit through a merger or acquisition transaction, often referred to as “M&A” for short. The process of this transaction may seem complex, and this post will attempt to demystify and simplify what to expect. This article will outline the four general stages of a M&A transaction.

Finding a buyer

The first stage of a transaction will involve finding a buyer. This process begins with informal and preliminary discussions with potential buyers. A company may also use a banker that can introduce them to additional buyers that may be interested in the target company. The focus of these discussions is primarily value and price exploration, as well as fit and feasibility for the buyer.

Before these conversations become more serious, it is best practice to require a non-disclosure agreement with potential buyers. This ensures that any confidential details that are shared with potential buyers cannot then be used for their own benefit if they choose to not go through with the deal. In some cases, a non-solicit agreement may also be necessary to prevent your employees from being recruited by the buyer.

2. Confirming a buyer

If a potential buyer has decided that they wish to proceed with the transaction, they will provide a letter of intent to the target. This letter of intent will outline the terms they request for the transaction. Terms stated are typically related to transaction structure, purchase price, earnout structure, loss compensation, escrow, and any additional closing conditions. Buyers also typically choose to include an exclusivity or “no-shop” term to prevent the target from engaging with additional buyers while the deal is being negotiated. Although usually non- binding, once the terms in the letter of intent are signed upon, it may become more difficult to re-negotiate certain terms. Thus, it is critical for the target to have their legal team thoroughly negotiate the letter of intent provided by the buyer before the terms outlined are agreed to.

3. Completing documents required for signing

In the pre-signing period, several essential documents will be prepared. The most important document prepared at this stage of the deal is the definitive document. This will be negotiated and agreed upon by the buyer, target, and their respective advisors. This document will outline all binding terms of the deal. It can often take several weeks before the definitive document can be agreed among the various parties.

Included in the definitive document is a list of representations and warranties regarding the target’s operations. Disclosure schedules should be established to qualify these representations and warranties and mitigate the buyer‘s potential rights to make a claim for indemnification, which could occur if representations are later found to have been false.

At this stage, the buyer will also request specific documents from the target, with these being outlined in a due diligence request list. Documents requested typically include those related to corporate formation, company financials, commercial contracts, and intellectual property portfolios, but are expansive, and will cover sensitive HR data on salary, bonuses, disputes, debts, as well as documents that indicate the quality of payables and receivables. The buyer may request any additional documents they feel necessary as they are looking for anything that may impact purchase price, or require additional terms being added to the definitive document.

4. Signing the document and closing the deal

When the definitive document is agreed upon, along with any additional documents presented, all parties will sign the document. At this point, closure may occur if all conditions of the deal have been met.

If certain conditions remain outstanding after signing the document, there will be a period between signing and closing that allows for these terms to be satisfied. Conditions that may be taken care of during this pre-closing period include obtaining government approvals, third-party consents, or employee agreements.

When all conditions outlined in the definitive document are satisfied, funds are exchanged, and the deal is closed. This is the moment of the actual transaction.

Following closing, all responsibilities associated with the company will reside with the buyer. Those associated with the company that was sold should take the time to consider their next venture and thank all that helped them through the successful transaction.

Louis Lehot is founder and managing partner of L2 Counsel, P.C.

About Louis Lehot

Louis Lehot is founder of L2 Counsel, P.C. Mr. Lehot specializes in corporate, securities, and M&A law. His clients include private and public companies, as well as their investors, across a range of industries. Mr. Lehot is known for his passion in assisting companies in reaching their growth objectives.

About L2 Counsel, P.C.

L2 Counsel, P.C. is an elite boutique law firm based in Palo Alto, California. We are positioned to serve innovators, disruptors, entrepreneurs, and their investors with sound legal advice and strategies. We serve private and public companies at all stages of development. Our experience positions us to provide tailored advice that is practical, commercial, and cost- effective for our clients in all stages of growth.