How does a business acquisition work? The M&A process step by step

A business acquisition works as a sequence of stages in which each one narrows the field and raises the commitment: the seller prepares and values the company, approaches buyers under a confidentiality agreement, receives indications of interest, grants one buyer exclusivity through a letter of intent, opens the company to due diligence, negotiates a purchase agreement while the buyer arranges financing and any regulatory filing, then signs and closes, with price adjustments and integration following the closing. Information is released in step with commitment: a buyer learns more only as it promises more.

This article describes the sale of a privately held company, seen from both the sell side and the buy side, as the process is commonly run in the United States, the United Kingdom, Australia and other markets that use the same documents. The regulatory section describes the United States premerger notification specifically. Practice, terminology and law vary by country and by deal size, and a very small sale compresses the same sequence into fewer documents. This is general information, not legal, tax or investment advice.

What are the stages of a business acquisition, in order?

A business acquisition has ten stages in order: preparation and valuation, approach of buyers under a confidentiality agreement, the information memorandum, indications of interest, the letter of intent with exclusivity, due diligence, the purchase agreement, financing, regulatory filings where they apply, and signing and closing, followed by post-closing adjustments and integration.

The worked example used throughout this article is illustrative. A private company with normalized earnings before interest, tax, depreciation and amortization (EBITDA) of $4.0 million is sold at 6.0 times that figure, an enterprise value of $24.0 million. The multiple is an assumption chosen for the arithmetic, not a market rate.

How does a seller prepare a company and set a price expectation?

A seller prepares by making the company readable to an outsider and by forming a defensible view of value before any buyer is contacted. Both tasks are done with the advisor in the weeks before the market hears anything, and they decide most of what happens later.

Making the company readable means financial statements that reconcile to management accounts, a schedule showing how reported profit becomes normalized profit, a list of material contracts with their change-of-control clauses, and clean corporate records. Many sellers commission their own financial review, often called vendor due diligence or a quality of earnings report, so that the awkward findings are known and explained before a buyer discovers them.

Setting the price expectation is a valuation exercise: comparable transactions, comparable listed companies and a discounted cash flow, each giving a range. How to value a business for sale is the subject of a separate article; the point for the process is that the expectation is agreed privately between owner and advisor, and is usually not published.

The seller also decides at this stage what is being sold. A buyer can acquire the shares of the company, taking everything inside it, or selected assets and liabilities out of it, and the choice changes the tax result, the consents needed and the risks transferred. That decision is covered in the articles on asset sales versus share sales and on structuring a business sale.

On the buy side, preparation is the mirror image: a corporate acquirer gets a mandate from its board, a private equity fund screens the company against its investment criteria, and an individual buyer confirms with lenders how much can be borrowed. A buyer that has done this work can answer the seller's first question, which is whether the buyer can actually complete.

How are buyers approached without breaking confidentiality?

Buyers are approached in two steps: an anonymous summary that describes the company without naming it, then, only for those who sign a confidentiality agreement, the full information memorandum. The sequence exists because a sale that becomes known too early can unsettle employees, customers and suppliers before there is any deal to announce.

The anonymous summary is often called a teaser. The confidentiality agreement, or non-disclosure agreement, then sets what the recipient may do with what it learns: use it only to evaluate the transaction, share it only with named advisers and funders, return or destroy it on request, and usually refrain for a period from soliciting the company's employees and customers.

The breadth of the approach is a choice between three formats. A negotiated sale with one buyer is the fastest and the least likely to leak, and gives up competitive tension on price and terms. A broad auction tests the widest market, strategic and financial buyers alike, at the cost of more management time and a higher chance that the sale becomes known. A targeted process, with a short selected list, sits between the two.

The worked example is a targeted process: 40 buyers receive the summary and 22 sign, which is 55%. The information memorandum those 22 receive is a selling document prepared by the advisor from management's information, and buyers read it as the list of claims they will later test, against a common deadline for their indications of interest.

What is the difference between an indication of interest and a letter of intent?

An indication of interest is a buyer's first, non-binding statement of a value range based on the information memorandum alone, while a letter of intent is a later, more detailed offer from a buyer that has met management, naming one price and one structure and asking for exclusivity. The first selects who goes further; the second selects who gets the deal.

An indication of interest typically gives a range, the form of consideration, the source of funds, the main assumptions, the diligence the buyer wants to do and the approvals it needs. In the example, six indications arrive and four buyers are invited to meet management.

The letter of intent, also called heads of terms or a term sheet depending on the country, is where the commercial deal is fixed in outline: price, whether shares or assets are bought, how the price is paid, the treatment of cash, debt and working capital, the key conditions, the timetable and the length of exclusivity. Most of it is expressly non-binding. The clauses that are usually binding are exclusivity, confidentiality and costs.

The example shows why the highest number does not always win. The two letters of intent are:

• Offer A: $24.0 million, with 80% in cash at closing ($19.2 million), 10% as a seller note ($2.4 million) and 10% as an earn-out of up to $2.4 million, financing already indicated by a lender.
• Offer B: $25.0 million, with 60% in cash at closing ($15.0 million) and the balance deferred or contingent, financing still to be arranged.

Offer B is $1.0 million higher on paper and $4.2 million lower in cash on the day. The seller chooses Offer A. Certainty of completion and the share of price paid at closing are compared alongside the headline, and a letter of intent is the last moment the seller negotiates with real leverage: once exclusivity is signed, the competing buyers have gone home.

What happens during due diligence, and who does the work?

Due diligence is the buyer's verification of the company against what the seller has said about it, carried out by the buyer's own team and outside specialists through a virtual data room, a written question-and-answer process and meetings with management. It usually runs for the whole exclusivity period.

The work is divided into streams. Accountants test the quality of earnings, net debt and the normal level of working capital. Tax advisers look for exposures in past filings. Lawyers review ownership, contracts, litigation, employment, property, intellectual property and regulatory permits. Commercial advisers or the buyer's own people test the market, the customers and the forecast. The full method, with its request lists, belongs to the article on the due diligence process.

What matters for the process is where findings go. A finding is never just a note in a report: it becomes one of four things in the deal. It can reduce the price. It can become a specific indemnity, where the seller agrees to bear a named risk. It can become a condition that must be fixed before closing. Or it can end the discussion. A seller who disclosed the issue during preparation controls which of the four it becomes; a seller whose buyer finds it in week six does not.

What does the purchase agreement contain?

The purchase agreement is the definitive contract that transfers the company, and it has six main parts: what is sold and for how much, how the price is adjusted, what the seller states to be true, what must happen before closing, how losses are recovered afterwards, and the restrictions on the seller after the sale. It is called a share purchase agreement or stock purchase agreement when shares are sold, and an asset purchase agreement when assets are.

The seller states, for instance, that there is no litigation, and the disclosure schedule lists the exceptions. Anything fairly disclosed is the buyer's risk, and anything untrue and undisclosed gives the buyer a claim. Whether part of the price is held back or an insurance policy stands behind those claims is covered in the articles on holdbacks and warranty insurance.

Around the main agreement sit the ancillary documents: employment agreements for managers who stay, the seller note and any security for it, lender documents, board and shareholder resolutions, and the paperwork that actually transfers title.

How does the buyer finance the purchase?

A buyer finances an acquisition from four sources, alone or combined: cash it already holds, new equity from investors, debt from lenders, and money left in the deal by the seller as a deferred or contingent payment. The financing work runs in parallel with due diligence because lenders want to see the same findings.

In the worked example the buyer must fund $19.2 million of cash to the seller and $0.8 million of transaction costs, a total of $20.0 million. A senior lender provides $12.0 million, which is 3.0 times EBITDA and 60% of the funds needed; the buyer's equity is the remaining $8.0 million, or 40%. The $2.4 million seller note and the earn-out of up to $2.4 million are not funded at closing at all: they are the part of the $24.0 million the seller agrees to wait for.

A seller should read the financing as carefully as the price: an indicative term sheet from a lender is not a commitment, and a signed commitment letter is. How seller financing is repaid, and how an earn-out is measured and paid, are treated in their own articles.

When does a deal need a regulatory filing, and how does the United States premerger notification work?

A deal needs a regulatory filing when it meets a merger-control threshold, falls in a regulated or sensitive sector, or involves a foreign buyer in a country that screens investment; in the United States, the main one is the premerger notification under the Hart-Scott-Rodino Act, which requires the parties to certain large transactions to file and then wait before closing.

According to the Federal Trade Commission, not every deal requires a filing: generally the transaction must first have a minimum value and the parties a minimum size, and those thresholds are updated every year. The Commission's threshold page gives the 2026 adjusted figures, effective February 17, 2026: $133.9 million for the basic transaction-size test, originally $50 million in the statute, and $535.5 million for the higher test, originally $200 million. Between the two, the statute's size-of-person tests apply, adjusted for 2026 to $26.8 million and $267.8 million. Some acquisitions are exempt, and whether a given deal is reportable is a question for antitrust counsel.

Where a filing is required, the Federal Trade Commission describes the process as follows. For most transactions both the buyer and the seller file. The filing goes to both the Commission and the Department of Justice, but only one of the two agencies reviews a given deal. The parties must then wait 30 days before closing, or 15 days for a cash tender offer or a bankruptcy sale, unless the agency ends the period early. If the reviewing agency wants more, it issues a second request, and the parties may not close until they have substantially complied with it and a further 30 days have passed, or 10 days for a cash tender offer or bankruptcy. The agency can then close its investigation, settle with conditions through a consent agreement, or go to federal court to block the transaction.

The filing carries a fee. The Federal Trade Commission's 2026 schedule starts at $35,000 for a transaction under $189.6 million and rises in tiers to $2,460,000 for one of $5.869 billion or more; the acquiring person is responsible for paying it, although the parties may agree to share it.

The $24.0 million sale in the example is far below the 2026 threshold, which is about 5.6 times its size, so no premerger notification is filed. Being below a filing threshold does not place a transaction outside competition law, and other approvals can still apply: merger control in other countries where the companies trade, foreign investment screening, and sector regulators in fields such as financial services, healthcare, telecommunications or defence. Each one adds time between signing and closing.

How long does the M&A process take?

The sale of a mid-sized private company commonly takes several months to a year from the start of preparation to closing, and the length is set mostly by how prepared the seller is, how the buyer is financed and whether any approval is needed. There is no official figure, so the timeline below is an illustration of how the stages overlap, not a benchmark.

After the letter of intent, nothing is sequential. Due diligence, financing and the purchase agreement run at the same time and depend on each other, which is why a delay in one, a late audit schedule or a slow lender, moves the closing date for all three. The chart also shows that 23 of the 36 weeks pass before one buyer is chosen.

Who is involved at each stage?

An acquisition involves two principals, the seller and the buyer, and around each a team of advisers whose role changes by stage: the financial advisor leads the early stages, the accountants and lawyers lead the middle, and the lawyers, lenders and whoever handles the funds lead the end.

What happens at signing, at closing and afterwards?

At signing the parties become bound by the purchase agreement; at closing the price is paid and ownership passes; afterwards the price is trued up against the closing accounts, deferred amounts fall due and the buyer integrates the business. Signing and closing happen on the same day when nothing stands between them, and are separated when an approval, a consent or the financing must come first.

Between a split signing and closing, the agreement requires the company to be run in the ordinary course. The lawyers assemble a closing checklist and a funds flow statement listing every payment to be made on the day: to the sellers, to lenders being repaid, to advisers, and into any escrow or holdback account.

On the closing day of the example, the buyer's $20.0 million arrives from two sources, $12.0 million of debt and $8.0 million of equity, and leaves in two directions: $19.2 million to the seller and $0.8 million of costs. The article on getting from enterprise value to the amount wired at closing walks through the deductions for debt, cash and working capital that a real funds flow adds to this simplified picture.

After closing, three things run in parallel. Closing accounts are prepared, usually within a period fixed in the agreement, and the price is adjusted up or down against the working-capital target, a mechanism with its own article. The deferred elements start their life: in the example, the $2.4 million seller note is repaid on its schedule and the earn-out of up to $2.4 million is measured against the agreed targets. And integration begins: systems, reporting, contracts, branding and people. Experienced acquirers plan integration during due diligence, not after closing.

What most often stops a deal?

A deal most often stops for one of a handful of reasons: results that slip during the process, a diligence finding the price cannot absorb, a gap in price expectations that structure cannot bridge, financing that does not arrive, a consent or approval that is refused or delayed, or simple loss of momentum. Each has a typical moment and a typical prevention.

• Trading falls short of the forecast, usually during exclusivity when monthly results arrive. A forecast management can beat, and early warning to the buyer, reduce the risk.
• An undisclosed problem is found in due diligence. Seller-side review and disclosure before marketing reduce the risk.
• A price gap opens between diligence and signing. Clear normalized earnings, and an earn-out or deferred terms to bridge the difference, reduce the risk.
• Financing fails, late and near signing. Checking the buyer's funding at the letter of intent reduces the risk.
• A consent or approval is refused or slow, between signing and closing. Mapping consents and filings at the letter of intent reduces the risk.
• Fatigue and drift set in after exclusivity. A fixed timetable and one person accountable on each side reduce the risk.

The first cause deserves the most attention because it is the least dramatic. A company whose monthly numbers hold through the process gives the buyer no reason to reopen the price; one that misses its forecast by a visible margin in the middle of due diligence invites a renegotiation at the moment the seller has no other bidder. Running the business well during the sale is the seller's strongest negotiating position.