10 Documents You Need in a Business Sale Process

M&A processes follow a set of standard stages and involve a large amount of documentation. Not all of the documents we cover here are mandatory, but they are highly advisable to avoid misunderstandings or mistrust.

This documentation is usually prepared by the seller, since the seller knows the state of the company best. The seller typically gets advice and support from a mergers and acquisitions (M&A) expert.

1. Sell-side or buy-side mandate

This is a written agreement between individuals or legal entities. It sets out all the requirements to be included in the deal. It also usually includes a description of the target company (company profile, industry, geographic area, etc.).

Although it is very similar to a power of attorney, the two should not be confused. A power of attorney is a unilateral declaration of intent that does not set out a specific obligation. The attorney-in-fact acts on your behalf, which is not the case between the principal and the agent under a mandate. Here, both parties negotiate a contract with a specific obligation, and the agent does not take the place of the principal.

2. Sale memorandum or info memo

This document is essential if you want to sell a company or find investors for it. Although it is not usually mandatory, it is the best introduction you can make and signals seriousness and know-how. It is very similar to a business plan. Importantly, though, the sale memorandum should not include all of the company's information. That comes later, once both parties have reached an agreement.

It generally has six sections:

1. Executive summary.
2. Overview of the industry and the subsector the company belongs to.
3. Company analysis, for which a SWOT analysis is very useful, as it sets out strengths, weaknesses, opportunities, and threats.
4. Analysis of competitors, their market share, and the strategies they have implemented.
5. General financial data for recent years.
6. Realistic growth potential.

3. Blind profile or teaser

This is a document that summarizes all the relevant information about the company anonymously, meaning the company cannot be identified or located. That is where the name "blind" comes from. It is the first document about the company that reaches potential buyers or investors, so it should be short and sell the company concisely.

It is made up of the following parts:

1. A description of the company in a couple of paragraphs.
2. The reason for selling or seeking investors.
3. Key financial figures, such as the income statement totals for recent years.
4. Reasons why it is a good idea to buy it or invest in it.

4. Letter of intent (LOI) or memorandum of understanding (MOU)

This is a formal written agreement between the parties. It is a binding document that sets out a series of obligations. It covers deadlines, the terms of the agreement, the stages, and even compensation if either party fails to comply.

It commonly includes confidentiality clauses. These matter not only because of the information the parties exchange, but also because, at this point, word of the negotiations getting out could cause commercial harm. Imagine if customers or suppliers found out. Many would probably walk away because it would create uncertainty.

5. Due diligence report

Due diligence is the process of verifying all the relevant information about the company, and it is essential for both parties. For the buyer, it reduces the risks they take on and allows them to make a more informed decision, because it provides a complete view of the business.

The seller, in turn, gets important information about the company's real value, which helps them set more realistic expectations. The seller also gains information about the buyer, which helps them find out whether the buyer is sound from a reputational and financial standpoint.

6. Representations and warranties (R&W)

This document contains a series of clauses negotiated between the parties. Under these clauses, the seller warrants and states that the information provided about the company is true. The buyer, in turn, confirms that what they have stated is truthful, complete, and accurate.

This is very important because if either party turns out to have lied, they would have to compensate the other party for the damages caused. As a result, this document complements due diligence.

7. Share purchase agreement or stock purchase agreement (SPA)

This contract governs the acquisition of all or part of the shares of the company. In other words, the buyer acquires part or all of the ownership of the company, along with its corresponding assets and liabilities.

The main elements of an SPA are:

1. A detailed description of the transfer of ownership.
2. Price, payment methods, and deadlines.
3. Representations and warranties.
4. Non-compete clauses, where applicable.
5. A detailed description of liabilities and debts.

8. Asset purchase agreement (APA)

This is a formal written agreement covering the purchase of all or part of a company's assets. It describes the terms and conditions of the transaction.

It typically contains the following elements:

1. Description of the assets being transferred.
2. Price and methods of payment.
3. Liens and debts on those assets.
4. Mandatory conditions that must be met before closing.
5. Non-compete clauses.
6. Representations and warranties.
7. Legal and financial standing of both parties.

9. Shareholders' agreement

Shareholders' agreements are legal agreements that set the rules and guidelines for the relationship between the partners or shareholders of the companies involved in the deal. They are especially relevant when two or more companies decide to merge, or when one company acquires another but the acquired company continues to operate relatively independently or has a diverse shareholder base.

In an M&A deal, these agreements are key to making sure the expectations and interests of all parties are clearly defined and protected. This minimizes the risk of future conflicts and ensures a smoother transition and post-acquisition or post-merger operation.

Shareholders' agreements in M&A typically cover areas such as:

1. Corporate governance: they set out how major decisions will be made in the company, defining, for example, the composition of the board of directors, voting rights, and how conflicts will be resolved.
2. Shareholder rights and obligations: these include voting rights, information rights, funding obligations, and other shareholder duties and rights.
3. Share transfer clauses: they set the conditions under which shareholders can or must sell their shares, such as preemptive rights and exit clauses.
4. Conflict management: they provide mechanisms to resolve disputes between shareholders, or between shareholders and the company's management.
5. Dividend policy, defining how and when profits will be distributed among shareholders.
6. Minority protection: they establish safeguards to protect the interests of minority shareholders.
7. Non-compete and confidentiality: they may include clauses to protect the company from unfair competition and ensure the confidentiality of sensitive information.

10. Non-disclosure agreement

In an M&A process, the confidentiality agreement is a legal contract between the parties involved in the negotiation. Its purpose is to protect the sensitive and confidential information shared during the process. This agreement is also known as a non-disclosure agreement (NDA).

Purposes and functions of the NDA in M&A:

1. Protect sensitive information: during M&A negotiations, the companies involved usually share detailed, confidential information, such as financial data, business strategies, customer information, and intellectual property data. The NDA ensures this information is not disclosed to third parties.
2. Set limits and conditions: the agreement defines what information is considered confidential, who can access it, how it can be used, and how long confidentiality will last.
3. Prevent unfair competitive advantages: it stops either party from using the information obtained for its own benefit if the transaction does not go through.
4. Encourage openness in negotiations: by guaranteeing confidentiality, the parties feel more comfortable sharing the critical information needed to properly evaluate the transaction.
5. Set consequences for breach: the agreement details the penalties or legal action that can be taken if either party violates its terms.
6. Time frame: it defines how long the information must be kept confidential, even if the M&A deal does not go ahead.

In short, the documentation required in an M&A process is extensive and detailed. All of it aims to minimize the risks the parties take on. In addition, the transparency and clarity it provides prevent misunderstandings and keep the deal from falling apart. That is why these documents are essential in mergers and acquisitions.