It’s an exciting time in the business world. Across the country, major purchase deals have taken place among key US companies, as well as overseas with international partners.
Here’s a look at some of the big business deals making news with their announcements since the beginning of January:
- Google bought Nest Labs Inc. for $3.2 billion
- Apollo Global Management acquired CEC Entertainment Inc., parent company of the popular Chuck E. Cheese restaurant franchise in a $1.3 billion deal.
- Verizon Communications agreed to purchase Intel Media’s intellectual property TV assets, known as On Cue, to expand their television offerings. Asset price was not disclosed, but it was predicted to be around $200 million.
- Abroad, China’s Lenovo Group Ltd. bought IBM’s server business for $2.3 billion, and obtained Motorola Mobility for $2.9 billion — two of China’s biggest technology deals to date.
These companies wasted no time charging into 2014, which is precisely what keeps them on the forefront of their industries. After less than two months in, we can expect 2014 to be a year of opportunity, growth and vision in the North American economy.
But deals don’t happen overnight. At least not the kind listed above. In reality, most take months, or even years to transpire.
So how does a business purchase work? And what kind of legal agreements are involved in the process?
Here you’ll find an overview and simplification of the business purchase process, starting from the initial offer, to the purchase agreement.
Indication of Interest (IOI)
Sometimes in M&A (merger and acquisition) deals, an interested buyer will send a seller an Indication of Interest (IOI). An Indication of Interest is a way for the purchasing company to express non-binding interest in buying a company. Consider it similar to a pitch or query letter, whereby the purchaser declares “I am interested” with a valuation of the selling company. At this stage the buyer has limited information, as they have yet to do due diligence, but they are looking to test the waters and engage the seller with a “foot in the door” offer.
The IOI usually includes, but is not limited to, price range, due diligence period, source of financing, transaction structure and timeline. It lets the seller get an overview of the marketplace, phase out non-serious buyers and invest time in credible and worthy offers. However, this document does not guarantee the seller will follow through the entire purchase process.
Offer to Purchase
Because every business deal is unique, not all purchases will begin with an Indication of Interest. A considerable amount of purchases start with a Letter of Intent (LOI), also referred to as a term sheet or Offer to Purchase, and skip the IOI altogether.
An LOI is drawn up by the purchasing party for the seller, clearly asserting their intentions to move forward with firm purchase details, negotiations and due diligence to lock in the sale of the business.
The Letter of Intent generally includes, but is not limited to:
- Transaction description, including the type of deal (shares or assets), business type, and liabilities to be assumed
- Purchase price and deposit amount, structure, funding, schedule and other financial conditions as needed
- Additional terms, such as expectations and non-competition requirements
Shares and Assets
There are two types of purchases during a business deal — the purchase of shares or the purchase of assets. Apollo Global Management’s deal to buy CEC Entertainment Inc. illustrates a purchase of shares. They paid $54 a share for Chuck E. Cheese’s parent company and also assumed all their outstanding debt.
Verizon’s deal with Intel Media demonstrates a purchase of assets. Verizon purchased Intel’s assets in the form of intellectual property. Intel remains its own corporation but Verizon acquired the rights to their On Cue technology to expand and improve their own television delivery business.
It’s important that the purchasing company clearly states their intentions in the Letter of Intent and avoid vague or ambiguous provisions. Although the LOI is a non-binding agreement, it does grant the benefit of exclusivity over a purchase through what is referred to as a no competition clause.
If the seller agrees to the LOI, the purchaser can then complete their due diligence, examining the company’s financial statements, accounting and business records. The purpose of due diligence is to see if there are any red flags in the company’s records and also acquire information to accurately value their assets.
Due diligence can take time, especially if the transaction is a large-scale negotiation. During this effort, the selling company may ask the purchasing team to sign a Non-Disclosure Agreement (NDA). This contract safeguards a selling company’s information and ensures its privacy is not compromised. In other words, use of the records on anything outside the business deal is off limits.
Technology companies are encouraged to use NDAs due to the nature of their data and intellectual property being easily duplicated.
Furthermore, if the selling company is in a Commercial Lease Agreement, the buyer may have to work with the landlord to transfer their existing lease or negotiate a new lease.
Business Purchase Agreement
The most comprehensive document in the sales process is the Business Purchase Agreement. As a binding contract, it lays out the entire terms of the sale, including provisions mentioned in the LOI, a list of definitions, price adjustment and other conditions not covered previously, such as indemnification, adjustments, seller’s reply, 72-hour clause and warranties.
A more intensive list of sales provisions includes, but is not limited to, the following:
- Office equipment, furniture, decorations, supplies, stationary and publications
- Business clients, goodwill and working agreements
- Books, reports, files, data processing or computer programs, financial statements, accounts receivable, analyses, company phone and fax number
- Trademark or commercial name, patents or design, permits and licenses, and royalties or subsidy rights
- As well as a list of assets not included in the sale
Purchasing a business can take anywhere from a few months, to a couple of years, to complete. The time depends on the size of the business, amount of negotiations and due diligence period needed to wrap up the deal.
Google’s relationship with Nest Labs developed over a three year history. Nest’s CEO, Tony Fadell, first showed Sergey Brin, co-founder of Google, one of their products in early 2011. From there, Google had a special interest in Nest technologies and invested in a 12% stake. A few years and multiple term sheets later, Google officially owns Nest Labs and closed their deal on February 7, 2014.
The business purchase process is a complex cycle of back and forth negotiations that involves several contracts along the way. The process described above is merely an outline for the various stages of agreement. Smart deals take time for good reason, so be sure to invest your time wisely and devise a deal worth making.