Informing the buyer of your business

When you sell your business, it is important that you give the buyer correct and full information. This prevents discussion during negotiations and after the transfer. Draw up a memorandum of sale that contains the important facts on your company. If a buyer is truly interested in taking over your business, draw up a letter of intent. The buyer has to conduct due diligence. Read this article to find out more about the contents and use of these documents.

Seller and buyer document information and agreements in:

• the memorandum of sale
• the letter of intent
• due diligence

Memorandum of sale

If you plan to sell your business, prepare a memorandum of sale to inform potential buyers of what they might be buying.

Why issue a memorandum of sale?

A memorandum of sale gives potential buyers insight into what your company is, and how much it is worth. General company information will not suffice. In the memorandum of sale, you list the history of the company, the reason you’re selling, the organisational structure and the financial situation, among other things.

What is in the memorandum of sale?

• introduction
• summary
• company history and background
• information about your products and services
• a market description
• production data
• organisational structure and culture
• financial company data
• other information, such as patent rights you have.

First things first: confidentiality statement

Show the memorandum of sale to seriously interested potential buyers only, and not before you have made them sign a confidentiality statement. After all, the memorandum of sale contains quite detailed information about your company. Consult an expert to help you set up the memorandum of sale.

The letter of intent

Negotiations with a buyer will result in various agreements. The outlines of these agreements, the safeguards and resolutive terms, and the procedure to be followed are all laid down in a letter of intent. Avoid including too many resolutive terms and safeguards, but do not make the wording too noncommittal either.

Purpose of the letter of intent

The purpose of a letter of intent is to establish some level of commitment between 2 parties. It demonstrates that negotiations are in a more advanced stage and that the outlines of an agreement have been reached. 'Good faith' plays an important role when parties sign a letter of intent. Either party can still withdraw before signing the final contract. There will come a point at which the talks have progressed so far that withdrawal is no longer an option, because it would be a failure to act in good faith. If a party acts in bad faith, the other party may charge them for costs incurred and even for lost profits.

Contents of a letter of intent

A letter of intent should include the following:

• the expiration date of the letter of intent
• extension of non-disclosure clause
• exclusivity clause (barring either party from negotiating with other parties)
• negotiation schedule
• valuation methodology
• non-solicitation clause
• reservations to a no obligation clause
• dispute resolution procedure
• resolutive terms (such as securing financing)

Keep it short

Letters of intent are short and to the point. Only include those agreements that are strictly necessary in order for the letter of intent to serve its purpose. If you make the LOI too long, you run the risk of making it look too much like a final agreement. An expert adviser or lawyer (in Dutch) is indispensable at this stage of negotiations.

Negotiations

Drafting a letter of intent is an important part of the negotiation phase (in Dutch) in the process of selling a business. At this stage, the buyer will also have to conduct due diligence.

Due diligence

Before the sale of a business becomes final, the buyer must conduct due diligence. In a nutshell, this is a closer look to verify the information given to them by the seller in the memorandum of sale, which served as the basis for the letter of intent.

Why conduct due diligence?

If you decide to sell your business, you have a duty to disclose, which means you have to share all important information about the company in a memorandum of sale and in further talks with the buyer. The letter of intent to buy/sell the company is based on this information.

Duty to investigate

The buyer of the business has a duty to investigate, which means they have to check (or have checked) the information you provided to verify its accuracy and completeness. Due diligence involves examining at least the legal, financial, tax-related and commercial aspects of the company. The results of this are published in a due diligence report. If discrepancies are found, the price or terms of the sale may be renegotiated.

Other stakeholders, such as a bank financing the acquisition for the buyer, may also be interested in the due diligence report, as they will want to have an extensive, detailed look at the company to eliminate uncertainty.

Due diligence: important considerations for the seller

• Carefully document how and under what conditions the buyer will conduct due diligence
• Explicitly state the consequences of the due diligence process, should it have a negative outcome
• Establish rules to adjust the sales price if necessary
• Check any discrepancies identified by the buyer
• Designate someone to monitor the due diligence process

What happens next

Like drafting the letter of intent, due diligence is an important part of negotiations when selling or buying a company. If you agree on the outcomes of the due diligence process, you can finalise the sale and start making arrangements for the transfer of the business.