Mergers & Acquisitions

Closing the Deal

The Definitive Guide to Negotiating the Sale of Your Business

Written by Jacob Orosz, President of Morgan & Westfield

If you’re in the process of selling your business or have recently received a letter of intent, you’ve come to the right place. In this straightforward, practical guide, I’ll take you behind the scenes to offer you tried and tested advice for one of the most important negotiations of your life.

Closing the Deal teaches you the art and science of negotiating the sale of your business. You’ll learn the fundamentals of every step of the process, from the letter of intent to the closing. This essential field manual offers you an effective blueprint to maximize your negotiating leverage and foolproof strategies to optimize your deal structure and after-tax proceeds. Closing the Deal is for owners of businesses valued from $1 million to $50 million and contains proven tactics for avoiding the most common pitfalls in negotiating the sale of your company.

I wrote this comprehensive handbook to give entrepreneurs actionable advice based on my more than 20 years of M&A experience valuing and selling hundreds of businesses. As the host of the M&A Talk podcast and president of Morgan & Westfield, I bring you strategies and tactics from experts throughout the industry to successfully close the sale of your business.

Knowledge can be communicated but not wisdom.

Herman Hesse

What’s Covered in the Book

A simple strategy for maximizing your negotiating position

Tips on structuring the transaction to maximize your after-tax proceeds

Practical guidance on preparing for and conducting due diligence

Clear advice on negotiating the purchase agreement

Straightforward information on building your deal team

Tactics for keeping the sale a secret from employees, customers, and competitors

A complete overview of M&A advisors and investment banking fees and agreements

Strategies for informing and retaining your employees and managing their expectations

Recommendations on preparing your key sale documents

Step-by-step direction on negotiating the letter of intent

Essential tips about deciding on and negotiating the key terms of an earnout

From Letter of Intent to the Closing Table

Selling a business can be a stressful process filled with many potential pitfalls. Yes, you’ll probably hire an investment banker or M&A intermediary, but you can’t expect them to handle the entire transaction on your behalf. The better you understand the process, the more likely you’ll maximize your price. That’s why I wrote this, for you the seller, to help avoid unwelcome surprises.

This practical guide is written primarily for owners of companies valued from $1 million to $50 million, though buyers, attorneys, accountants, and anyone else involved in the M&A process will benefit from the wisdom it contains. This size range tends to be a no-man’s-land because most business brokers aren’t equipped to deal with multi-million-dollar transactions, while the majority of investment banking firms are accustomed to handling much larger deals. Another challenge is that the potential purchaser can be an individual or a corporate buyer – and the process for maximizing your business’s value varies significantly depending on the type of buyer most likely to purchase your business.

When selling your business, it’s important to understand the shifting positions of power as the transaction unfolds. Your leverage is greatest early in the process, but this advantage shifts to the buyer the moment you sign a letter of intent. Until then, you’re free to negotiate with multiple parties, which strengthens your position. But once you sign a letter of intent, you’re limited to negotiating with one buyer. This obligation dramatically reduces your leverage throughout the rest of the transaction.

Signing the letter of intent is a crucial aspect of any transaction, but many sellers rush into this step while overlooking other vital terms. The letter of intent contains critical provisions that govern the dynamics of the relationship all the way through to closing. Once the letter of intent is signed, the arduous process of due diligence begins. Unfortunately, most sellers are woefully unprepared for just how grueling and long it can be, with less than half of companies making it to the endzone.

In Closing the Deal, I offer guidance on how to negotiate a letter of intent and lay out proven strategies for employing those dynamics to maximize your advantage. As the power pendulum swings, each party capitalizes on their leverage when they’re in the strongest position. Understanding how these dynamics can affect the entire transaction is key to getting the best deal.

I explain how your negotiating advantage shifts as the transaction advances and how you can optimize your position throughout the process. It’s also paramount to understand when a deal is most likely to go off the rails. As the seller, it’s essential you do everything possible to maintain your standing during the negotiations. This book shows you how.

If you’re looking for practical advice grounded in real-world experience, you’ve come to the right place. Closing the Deal offers you tried and tested strategies for negotiating one of the most important transactions of your life.

This straightforward guide walks you step-by-step through the process from accepting a letter of intent to closing while offering insights based on my two decades of helping entrepreneurs sell their businesses successfully. The sale of your business will be one of the most significant transactions of your life. Don’t go it alone. Thanks for trusting me to help make it a successful one.

Overview

Chapter 1 – Building Your Team: One of the first steps is forming your deal team. Your lineup can include an M&A advisor, M&A attorney, accountant, and other experts. Your M&A advisor will play the lead role and handle the entire sales process, from packaging your company for sale to orchestrating the negotiations with your attorney once you receive a letter of intent. Your attorney will then play a critical role in negotiating the letter of intent and purchase agreement. Your accountant will assist you in preparing financial statements and conducting due diligence and may also assist you with tax planning by helping you determine the optimal transaction structure. 

Chapter 2 – Managing Employees’ Expectations: One of the chief concerns of business owners is how and when to inform their employees of the sale. In this chapter, I lay out several strategies for informing your employees based on the size and culture of your company and offer tips for ensuring your employees are retained by the buyer. Finally, I provide guidance on alternatives to non-competition agreements with your staff.

Chapter 3 – Maintaining Confidentiality: The first step in the M&A process is for the buyer to sign a non-disclosure agreement or NDA. The NDA is a critical agreement and sets the tone for the negotiations. I include tips on negotiating the NDA and maintaining confidentiality, all while keeping the sale a secret from your employees, customers, and competitors.

Chapter 4 – Preparing Key Sale Documents: There are three key sales documents you should prepare – a teaser profile, a confidential information memorandum (CIM), and normalized financial statements. You don’t get a second chance to make a first impression, and this chapter shows you how to make the best possible first impression.

Chapter 5 – Maximizing Negotiating Leverage: How important are negotiating skills during the sales process? Not as important as you may think. Far more important is your position. While your M&A advisor will handle the negotiations, you must provide your advisor with a position of strength from which to negotiate. Your investment banker will be able to work out a deal much more effectively if they’re negotiating from a strong position. In this chapter, I show you how.

Chapter 6 – Negotiating the Letter of Intent: If the buyer is interested in making an offer after viewing the key sale documents, they will submit a letter of intent. Most sellers are in a rush to sign the letter of intent as they impatiently eye the end zone. But when accepting a letter of intent, you’re still on your 30-yard line, meaning you still have 70 yards to go. Once the letter of intent is signed, the arduous process of due diligence begins. Unfortunately, most sellers are woefully unprepared for just how grueling the remaining 70 yards can be. Signing a letter of intent is a crucial aspect of the deal. Your leverage can evaporate the moment you sign the letter of intent if you fail to include several crucial clauses that govern the dynamics of the relationship until closing. In this chapter, I walk you through these key provisions which allow you to maintain the most negotiating leverage possible.

Chapter 7 – Structuring the Deal: Is a $10 million offer good? It depends. The price can be paid in many different forms: cash, assumption of debt, a seller note, third-party financing, stock, an earnout, an employment or consulting agreement, a holdback, or licensing fees. The financial structure should be based on your goals and risk tolerance. You should also consider the legal structure of your transaction and its impact on taxes.

Chapter 8 – Deciding on an Earnout: Earnouts are a commonly used tool in M&A transactions. An earnout is a form of a deferred payment contingent on certain events occurring post-closing and can be tied to revenue, EBITDA, gross margins, net profit, or non-financial metrics. An intelligently drafted earnout formula is easily defined, measured, and objective. Unfortunately, earnouts are easily manipulated by the buyer once they’re in control of your business. You should take the time to learn how earnouts work so you can be prepared when you receive a letter of intent that includes one.

Chapter 9 – Conducting Due Diligence: Due diligence begins once you accept a letter of intent. In most circumstances, the buyer can walk away from the transaction if they’re unsatisfied for any reason. The outcome of due diligence determines the scope of negotiations and is a critical junction in the sale process. If no material problems are uncovered, the parties begin negotiating the purchase agreement and closing the deal. If material problems are uncovered, the parties often renegotiate the terms or abandon the transaction altogether. 

Chapter 10 – Drafting the Purchase Agreement: The brunt of the purchase agreement consists of representations and warranties, which compensate the buyer if you fail to disclose any material conditions before the closing. The remaining content includes the purchase price and terms, conditions to closing, covenants, termination rights, indemnification, and general contract provisions. The purchase agreement is a tool for allocating risk and is often the reason negotiations can become so contentious. While the letter of intent sets the price and terms, other major elements of the negotiations aren’t defined until the purchase agreement is drafted. It’s common for negotiations to stall during this stage when the parties attempt to allocate risks of the transaction. Unknowns are common, but the parties must continue marching toward the finish line despite the existence of such gray areas. 

Chapter 11 – Orchestrating the Closing: Once financing has been obtained, the purchase agreement has been negotiated and is ready to sign, and the other conditions have been satisfied, the closing can occur. In most cases, the closing is an uneventful formality. And that’s precisely how it should be. Once it has occurred, the parties have a vested interest in working together to successfully complete the transition period. While you may have reason to rejoice at the closing, don’t get too caught up in the celebrations. You shouldn’t be ready to fully “let go” until all your obligations are fulfilled. There generally won’t be a defining moment, but one day you’ll wake up and realize you’ve finally completed all of your obligations. When that happens, the real closing will have taken place. Congratulations.

Table of Contents

Chapter 1: Building Your Team

  • M&A Advisor or Investment Banker
  • M&A Lawyer
  • Accountant
  • Tips for Hiring and Working With Advisors
  • Other Specialists 

Chapter 2: Managing Employee's Expectations

  • Informing and Retaining Your Key Employees
  • Alternatives to Non-Competes with Employees

Chapter 3: Maintaining Confidentiality

  • Strategies for Maintaining Confidentiality
  • Non-Disclosure Agreements
  • FAQs About Non-Disclosure Agreements
  • Content and Analysis of NDA Language

Chapter 4: Preparing Key Sale Documents

  • Teaser Profile
  • Confidential Information Memorandum
  • Normalized Financial Statements
  • A Complete Guide to EBITDA and SDE
  • Choosing SDE or EBITDA to Value a Business
  • Releasing Information in Stages

Chapter 5: Maximizing Negotiating Leverage

  • Tip 1: Conduct Pre-Sale Due Diligence
  • Tip 2: Reduce Sunk Costs
  • Tip 3: Create Multiple Options
  • Tip 4: Maintain Emotional Objectivity
  • Tip 5: Focus on Running Your Business
  • Tip 6: Keep Your Business on the Market
  • Tip 7: Beware of Deal Fatigue
  • Tip 8: Listen Before Speaking
  • Tip 9: Use Honesty To Your Advantage
  • Tip 10: Make Conservative Statements

Chapter 6: Negotiating the Letter of Intent

  • Overview of the Process
  • Contents of a Letter of Intent
  • The Process of Negotiating the LOI
  • Tips for Negotiating the LOI
  • Problems and Solutions

Chapter 7: Structuring the Deal

  • Common Deal Structures
  • Ensuring a Favorable Deal Structure
  • Financial Components of Deal Structure
  • Legal Components of Deal Structure 
  • Legal Structure and Entity Type
  • Allocation of Purchase Price and Taxes
  • Partial Sales

Chapter 8: Deciding on an Earnout

  • Overview 
  • Objectives of Earnouts
  • Tips for Using Earnouts
  • Key Elements of an Earnout
  • Legal, Accounting, and Tax Implications

Chapter 9: Conducting Due Diligence

  • Preparing for Due Diligence
  • Due Diligence Overview and Process
  • Due Diligence Areas
  • Tips for Conducting Due Diligence
  • Sample Due Diligence Checklist

Chapter 10: Drafting the Purchase Agreement

  • The Process from Signing the LOI to Closing
  • Outline of a Typical Purchase Agreement
  • Negotiating the Purchase Agreement
  • Legal Form of the Transaction
  • Supporting Documents to the Purchase Agreement
  • Non-Compete Agreement
  • Representations & Warranties 
  • Indemnification

Chapter 11: Orchestrating the Closing

  • Preparing Emotionally for the Closing
  • The Closing Process

Chapter 12: Conclusion

Appendices

  • Appendix A: Glossary
  • Appendix B: Due Diligence Checklist
  • Appendix C: Purchase Agreement Clauses
  • Appendix D: List of Closing Documents
  • Appendix E: Escrow’s Duties
Closing the Deal

About the Author

Jacob Orosz

Jacob Orosz is President of Morgan & Westfield, host of the M&A Talk podcast series, and author of numerous articles and books on M&A, including The Art of the Exit, A Beginner’s Guide to Business Valuation, The Exit Strategy Handbook, and Closing the Deal. He has over 20 years of experience facilitating mergers, acquisitions, sales, and other business transfers with transaction values up to $75 million.

If you think education is expensive – try ignorance.

Derek Bok

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A Beginner’s Guide to Business Valuation

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The Exit Strategy Handbook

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A Beginner’s Guide to Business Valuation

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