Mergers and acquisitions (M&A) can be complex, but they are also valuable opportunities for businesses looking to grow, merge, or exit the market. Whether you are a buyer or a seller, understanding the general scope of a business acquisition can help you navigate the process with confidence. Below, we break down the four main steps of an M&A transaction, highlighting key terms and considerations along the way. It is important to note that although broken down in four steps, these steps can be performed out of order and contemporaneously with one another. Every transaction is different and your specific transaction may very dramatically.

The first step in an M&A transaction involves preliminary discussions between the buyer and the seller. At this stage, both parties assess the potential for a transaction and set expectations. To ensure that these discussions remain private, parties typically sign a Confidentiality or Non-Disclosure Agreement (“NDA”) to protect sensitive business information.

Beyond NDAs, other agreements may come into play, including:

• No-Shop or Exclusivity Agreement: A buyer may request that the seller refrain from engaging with other potential buyers while negotiations are ongoing, providing the buyer exclusive rights to pursue the deal.
• Standstill Agreement: The seller might require the buyer to agree not to acquire an ownership stake in the target business through alternative means, such as purchasing shares directly from existing shareholders or making a hostile bid if the company is publicly traded. This agreement helps prevent unwanted takeover attempts while discussions are ongoing.

Once these agreements are in place, the parties can usually move forward with more detailed negotiations.

After preliminary discussions, the next step involves outlining the basic terms of the transaction. This is usually done through:

• Term Sheets: A non-binding document summarizing the key elements of the deal, including price, structure, and conditions.
• Letter of Intent (LOI): A more detailed document that lays out the proposed terms of the acquisition, though it is often non-binding except for certain provisions, such as confidentiality and exclusivity.

The exchange of these documents sets the stage for deeper negotiations. At this point, both parties clarify their expectations, refine terms, and begin preparing for the due diligence phase.

Due diligence is a critical phase in any business acquisition. During this process, the buyer evaluates the target company’s financial health, legal standing, and operational structure. Key aspects of due diligence include:

• Financial Review: Examining financial statements, tax returns, debts, and cash flow.
• Legal and Compliance Check: Reviewing contracts, intellectual property rights, pending litigation, and regulatory compliance.
• Operational Assessment: Evaluating employee contracts, customer relationships, and business processes.

If the buyer does not have sufficient liquid capital, they may also use this phase to secure financing from investors or lenders. Additionally, regulatory approvals may be required. Even in smaller transactions, this could mean making required filings with the Secretary of State or other relevant agencies.

Furthermore, buyers may engage with key employees of the target company to discuss retention plans, ensuring that essential talent stays onboard post-transaction.

Once due diligence is complete and all necessary approvals are obtained, the transaction moves to the final step: signing the Definitive Agreement. This legally binding document formalizes the terms of the acquisition, including:

• Purchase price and payment structure
• Representations and warranties by both parties
• Conditions for closing the deal
• Any post-closing obligations, such as transition assistance or employee retention agreements

Upon signing, the business acquisition is legally finalized. However, disputes may arise post-closing, especially if issues surface that were not adequately addressed during due diligence. As such, indemnification provisions and dispute resolution clauses are often included in the definitive agreement to mitigate risks.

Business acquisitions can be intricate, but understanding the four main steps can help business owners navigate the process more effectively. Whether you are considering selling your business or acquiring another, it is crucial to work with experienced legal professionals to protect your interests and ensure a smooth transaction.

At Twisdale Law, PC, we assist businesses in mergers and acquisitions, providing guidance on everything from confidentiality agreements to finalizing the definitive agreement. Contact us today to discuss your M&A needs and ensure a successful transaction.