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The Top 6 Legal Steps in Acquiring a Lower Middle Market Business

Updated: Apr 25

The Top 6 Legal Steps in Acquiring a Lower Middle Market Business


When venturing into the world of lower middle market business acquisitions, understanding the critical legal steps can set you up for success. Drawing from our extensive experience and closing over $10 billion in transactions, we’ve distilled the journey into six essential legal milestones.


A meeting at Dean Street Law

 

1. Setting Up Your Acquisition Entity

The first step is the search phase. During this step, buyers should set up their acquisition entity early so that when they enter into non-disclosure agreements with sellers to review confidential information, memorandums, and letters of intent or indications of interest they have adequate legal protection for this phase of the transaction. Buyers have to set up their acquisition company anyway, so it's valuable for them to set up the acquisition company as early as possible. This will provide a strategic advantage that has the greatest return on investment. If you need to set up a single-member limited liability company, our Startup Bundle has everything you need to complete this.


2. Signing Non-Disclosure Agreements (NDAs)

Most sellers will require that a non-disclosure agreement be signed before they provide a confidential information memorandum or any confidential information about the business. However, this NDA is typically one-sided, and you need an NDA that will also protect the confidential information that you share with the seller. Underestimating the importance of having an NDA can leave proprietary information vulnerable. Ensuring comprehensive NDAs are in place before exchanging sensitive information is non-negotiable. Our NDA templates in the Acquisition Insights Course & Templates bundle provide robust protection that you can use prior to sharing confidential information with sellers or investors.


3. Crafting the Indication of Interest (IOI) and/or Letter of Intent (LOI)

If a buyer is interested in buying a business, a written agreement of the parties is the next step. Most buyers move straight to the LOI, which is a preliminary agreement of the parties as to the price structure and material deal terms of the transaction. It is binding in many regards and non-binding concerning key provisions such as price and certain deal terms, but it must be binding for things such as exclusivity, termination, and confidentiality. It is very important to get the LOI right the first time, as it will be the baseline for negotiations. This is where you have the most bargaining power, and the LOI is the legal foundation for the entire transaction.


If there is more time in the early negotiations of the transaction, or the seller would like more certainty before providing access to confidential information, the parties may enter into an IOI prior to entering into the LOI. An IOI is a preliminary, generally non-binding agreement, whereby the buyer submits an indication of their interest in the target company that includes a purchase price range and the highest level of an overview of the potential deal terms and structure to be negotiated by the parties.


We provide our battle-tested LOI and IOI templates, along with video tutorials on how to customize them in the Acquisition Insights Course & Templates bundle.


4. Conducting Due Diligence 

Typically, most buyers start to do preliminary business and financial due diligence prior to the LOI being signed and provide the full legal due diligence request list to the seller promptly after the LOI has been signed. While the buyer is completing their preliminary post-LOI business and financial due diligence, the seller should be preparing the data room and compiling all the information needed for the legal team to begin their due diligence process. After due diligence has been completed and the buyer feels comfortable moving forward in the transaction, the buyer's attorney will prepare the purchase agreement and ancillary transaction documents.


If you would like access to our pre-LOI due diligence request list and template legal due diligence request list, you can find them both in the Acquisition Insights Course & Templates bundle.


5. Negotiating Purchase and Ancillary Agreements

The purchase agreement will set forth the primary transaction obligations, rights and responsibilities of the parties, and there are generally two ways that a purchase agreement is structured. Most purchase agreements are intended to be signed before closing and other purchase agreements are meant to be signed at closing. Ancillary transaction documents will depend on whether the transaction is a stock purchase, asset purchase or merger and will at a minimum include a seller note, a non-competition and non-solicitation agreement, all of the consents required by the parties to approve the transaction and certificates as to the accuracy of certain information and to support representations and warranties within the transaction documents.  


Asset purchase ancillary transaction documents may include a bill of sale, assignment and assumption of contracts, lease or deed, employment agreements, assignment of intellectual property agreement, and more. Stock purchase ancillary transaction documents may include an assignment or transfer of stock/membership interests/partnership interests, stock powers (or the appropriate equivalent, FIRPTA certificates, and more.


The biggest mistake we see buyers make in this phase, and in the planning of the transaction and determination of the exclusivity period, is underestimating the amount of time the seller will take to review and revise each round of transaction documents. Sometimes this may take a week or two, but most of the time, it takes significantly longer.


We have complete lessons on each of these, and each section of the purchase agreement, in Acquisition Insights. In addition, you can access our closing checklist and timeline that auto-populates as a Gantt chart based on your target closing date in the Acquisition Insights Course & Templates bundle.


6. Preparation for, and Completion of, Closing

We work proactively throughout the transaction to set our clients up for a smooth closing process. There is nothing worse than transaction members who wait until the last minute to complete all of the preparations necessary to close the transaction. It creates more stress and opportunity for mistakes than there should be in a transaction.


Your closing checklist will include all of the things that need to be completed and tracked down prior to closing. This includes finalizing all of the transaction documents and preparing execution versions and signature packages. In addition, preparation for closing includes ordering good standing certificates to confirm that the parties are validly existing and can enter into the transaction and obtaining any third-party consents necessary to complete the transaction.


Our pro tip is to schedule closing from Tuesday to Thursday from 11 am to 1 pm so that your team has time before closing to finalize all of the transaction documents, create execution versions, compile signature pages, and track down any last-minute items. But, be sure to have enough time before wires close at the bank to provide a buffer for any unexpected occurrences.


Dean Street Law & Additional Resources

Embarking on a lower middle market business acquisition is complex and highly nuanced. Yet, with the right legal steps and expert guidance, it can lead to incredible success. At Dean Street Law, we’re committed to providing the insights and support you need to navigate this journey confidently.


Ready to embark on your acquisition journey with confidence? Explore "Acquisition Insights" for an in-depth legal course designed for buyers like you. It provides over 81 modules on the legal aspects of buying a business that includes videos for each module, written materials, checklists, and guides. Or, for personalized support, consider our flat-fee LOI drafting and negotiation services or sign up for group consulting to get support for your acquisition.


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