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In part 4 of our Selling a Business blog series, prospective purchasers participating in the process submit non- binding indicative offers to acquire the business by the due date in the sale timetable. It is essential that their offer letters include all the following components:
The buyer's details: The name of the entity ("the buyer entity") who will acquire the business in the event the prospective purchaser is selected as the successful acquirer.
The offer price. The amount offered for the business on a cash free, debt free basis.
Consideration. How the offer price will be paid, for example in cash or potentially shares in the buyer, if it is a company.
Payment structure. How payment will be structured, for example:
the whole offer amount being payable on the transaction completion date; or
a partial payment being made upfront, with payment of the remaining amounts deferred to a future date; or
a partial payment being made upfront under an earnout arrangement, which is when payments of future amounts are contingent on the business’ performance for a period (usually one to two years) after the completion date.
Key terms of the offer. Examples of terms that prospective purchasers may require in the event they are selected as the successful buyer are that:
all assets required to operate the business are included in the sale and transferred to them unencumbered;
any consents required for the sale from key customers, suppliers and landlords are obtained by the vendor;
working capital such as stock, debtors, creditors and employee entitlements that transfer to them with the sale are adjusted against the offer price;
the business doesn't have any capital expenditure commitments;
staff will be offered employment by the buyer entity.
the business will be transitioned to the buyer entity with the vendors assistance to the extent required; and
the vendor will commit to not competing against the business for a period after the sale (typically up to 5 years).
Due diligence requirements. The prospective purchaser will usually request that the following be made available to them to conduct their due diligence:
a data room with the business' key financial, legal, operational and tax documents
site visits; and
meetings with the vendor and CEO of the business.
Funding of the offer. This outlines:
the cash and debt facilities the prospective purchaser has in place to fund the purchase; and
the extent preliminary approval has already been obtained by debt and/or equity providers to provide further funding to the extent this is required.
Key conditions to submitting a final offer. These include all hurdles that the prospective purchaser needs to clear to be able to submit a final offer. Examples might be:
completing due diligence to its satisfaction;
receiving final approval from its Board of Directors; and/or shareholders for the transaction; and
successfully securing debt and/ or equity to fund the acquisition.
Transaction Timing. The prospective purchaser should confirm its ability to meet the transaction timetable contained in the sales process letter.
Request for exclusivity. Prospective purchasers often request a period of exclusivity to conduct due diligence and enter into a sale agreement with the vendor. The requested period is usually around 12 weeks, during which the vendor is prohibited from holding discussions with other parties interested in buying the business. Exclusivity periods are typically granted to prospective purchasers where:
their offer is significantly more attractive than other offers received; and
they are reluctant to continue in the process without it, given the significant costs that are often involved in conducting due diligence and negotiating a sale agreement.
When selling a business, it is critical for the vendor's mergers and acquisitions advisor to ensure that indicative offers are sufficiently comprehensive and completely transparent in all the above respects. This will limit the scope of parties who submit offers to change them when they submit their final offers in the next phase of the sales process.
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