Overview of the Business Sales Process

Owners, buyers, advisors—a business sale brings together multiple parties. Additionally, the complexity in each case is heightened by the specific characteristics of the business, making the transaction process potentially confusing for the seller. Therefore, this overview summarizes the essential process steps on both the buyer and seller sides during a business transfer.

A detailed presentation of the individual phases and an explanation of all important terms can be found here.

The sales process is typically divided into four phases:

1. The Preparation Phase
2. The Marketing Phase
3. The Negotiation Phase
4. The Contract Phase

The boundaries between these phases are often fluid, as some processes may begin earlier on the seller's side.

1. The Preparation Phase

If the owner of a business is aiming to transfer it to a successor or sell shares to third parties, it is crucial to develop a solid sales strategy early on. This first requires the owner to clearly define their intended goals.

It is generally advisable to involve an external advisor in the sales process. This expert can assist the seller in setting goals and guiding the next steps in the process, leveraging their experience from past transactions.

Once goals are set and the right advisor is found, a comprehensive assessment of the current status is carried out. Essentially, this means a professional analytical evaluation of the company, including existing strengths and potentials (SWOT analysis). This analysis will generate various sales scenarios, which can ideally help identify potential buyers.

At the same time, the value of the company is determined in this phase. There are different valuation methods used for company valuation, the most common being the asset-based approach, the earnings value method, and more recently, the discounted cash flow method.

During this phase, the buyer side also outlines their acquisition strategy in as much detail as possible. By creating detailed search profiles, interesting investment opportunities can be identified effectively.

Thus, in this first phase, it is important to clarify many questions in advance. The seller must be aware of how they want the company to be managed in the future. The advisor should get an overview of the company by evaluating its market position and identifying potential competitors. Answering such questions makes it easier for the seller to prepare for the marketing phase and target potential buyers more effectively.

2. The Marketing Phase

Following the analysis of existing structures and key figures, a compelling information memorandum is typically created on the seller's side. This provides potential buyers with an overview of the business's substance. To better appeal to investors, the desired transaction structure is also specified at this time, taking into account both legal and tax aspects.

This well-crafted investor solicitation then attracts interested buyers. Specifically, a long list and a short list are created during the investor search. The long list includes all potential investors who meet certain previously defined criteria, while the short list includes only those investors who will be actively approached.

These investors receive a so-called teaser upon contact. If they express interest, they are sent the previously prepared information memorandum along with a process letter after signing a non-disclosure agreement (NDA). If a serious purchase intention follows, it is documented in a non-binding, written letter of intent (LOI).

During the marketing phase, the buyer and seller sides indirectly come into contact for the first time. While the seller discloses their intention to sell, the buyer expresses serious interest in acquiring the company. However, both parties only meet personally in the next step.

3. The Negotiation Phase

Based on the information provided, investors then evaluate the company being transferred. This is typically done through a systematic analysis of the target company's data, covering legal, financial, tax, and market strategy aspects (known as due diligence or DD). For this due diligence, a secure electronic data room containing all confidential data and documents is set up.

If, after completing the DD, a firm interest in acquiring the company exists, it is formalized in a letter of intent (LOI). Following initial contact, preliminary discussions with potential buyers begin, often accompanied by presentations to the involved shareholders. Advisors provide support with expertise in finance, law, and taxation. The LOI is then also signed on the seller's side.

If agreement is reached, price and contract negotiations begin, typically initiated by the buyer side.

In the negotiation phase, the buyer's side takes the lead. The potential buyer must conduct various reviews to gain a comprehensive understanding of the company. Meanwhile, the seller should also consider whether the interested parties align with their vision and if they feel comfortable entrusting their company to one of the potential buyers for the long term. Once both sides are (at least broadly) aligned, the process can move to the next phase, the contract phase.

4. The Contract Phase

Once all preparations are made, questions are clarified, and goals and expectations are aligned, the successful completion of the sale is near. An experienced advisor can help achieve an optimal result in the subsequent price and contract negotiations. If there is more than one interested buyer, a bidding process (also called a bidding competition) is conducted, similar to an auction, where offers are submitted.

If agreement is reached during the negotiations or one investor wins the bidding competition, the transaction can be completed. This first requires the buyer to select appropriate financing structures. Specifically, this means structuring the transaction and securing transaction financing.

After the transaction is notarized, the contract is signed (known as signing), and the sale is officially completed (known as closing). The buyer can then plan an integration strategy and issue a press release. The seller, on the other hand, can start focusing on the next phase of their life.

Contracts and negotiations are at the heart of this final phase of the sales process. This step is of extreme importance for both the buyer and the seller.

Conclusion

Once these steps—from setting goals and finding investors to signing the contract—are completed, you have successfully navigated all four phases of the sales process and sold your company. You have secured your life's work for the future. Now you can focus on other personal and professional goals or prepare for retirement.

This article is intended to help break down the business sale into its essential components, thereby reducing the complexity of the sales process. A comprehensive breakdown of the individual phases, including further details and explanations of all significant terms, can be found here.

Are you considering selling your business? Feel free to contact our experienced succession and transaction advisors, who can support you with know-how and expertise from past succession processes.