The critical role that documentation plays in a successful M&A transaction cannot be overemphasized. Indeed, if you want to have a “clean” transaction, one where you, the seller, is protected, documentation that dots the Is and crosses the Ts is critical.
One of the most important documents that many novice business sellers have no experience with is the Letter of Intent (LOI). So, what exactly is the LOI?
“The LOI is an important step because it lays out the basics of the final deal: the purchase price and terms, closing date, length of exclusivity, approvals, and much, much more. However, the LOI isn’t necessarily the final deal. Rather, it’s the framework or roadmap for that final deal. Based on what each side discovers during due diligence, and/or whether the profits of the company decline, the deal may change.”
Essentially the Letter of Intent is a framework for the deal, but what it does most importantly is commit both parties to move forward with the deal exclusively.
As such, the LOI provides the seller with the confidence that the proposed buyer is serious, and likewise the buyer gains the knowledge that the seller is committed to working on closing the deal (assuming all the following steps in the transaction pan out).
It is an important document in the process of selling a business, one that you, as a seller, should require of any and all serious buyers.
Therefore, getting the Letter of Intent right is vital. But to the novice, what is important in the LOI? Here are some general guidelines.
First, although they’re similar in many ways, an LOI is different from an indication of interest (IOI). Both documents are part of the process of buying or selling a company; however, the LOI lays out more specific terms. So, don’t confuse the two.
An IOI is like asking for a date, while an LOI is a marriage proposal. Although some sophisticated buyers often include significant details in their IOI, it is still incumbent upon the seller to get a formal LOI from the buyer.
Secondly, exclusivity is a key consideration. An LOI usually includes a lock-up period where the seller is out of the market — that is, unable to speak with other buyers about doing a deal. Sellers should grant exclusivity very carefully and should do everything possible to limit the amount of time they’re prevented from speaking to other buyers.
This is a key issue to consider when selling a business. Your lockout period means that you will be unable to market your business to anyone else. This can be detrimental given that even a 90-120 day lockout means that any other interested parties will most likely move onto other opportunities during this time frame.
In addition, once it becomes known that the seller has entered into a Letter of Intent (even if the terms are confidential), if the transaction does not close, the perception may arise that the buyer found something wrong and walked away.
True or not, such perceptions can have an adverse impact on the ability of the seller to find a replacement buyer at the same price. So, be sure that your buyer is truly interested before countersigning any LOI.
This points out what we have said several times in these postings: Hire an M&A advisor to guide you through the complicated process that any exit can (and will) be.
Most likely you will only exit one business in your professional career. Learning “on the job” regarding how to effectively do this can have a huge negative impact on you, your family, and your financial legacy.
Most buyers that you want to be in negotiations with are what we call “professional buyers,” the kind that make several acquisitions annually and are very experienced and knowledgeable about how to buy companies to their benefit (ROI), not yours.
Before you sign a proposed Letter of Intent, have your M&A advisor and M&A attorney review it closely so that it is detailed enough to protect you and your interests. Since most LOIs are drafted by the buyer, this is critical.
This is how our friends at Smith, Gambrell, & Russell LLC put it in a recent article:
“For a seller, the letter of intent often provides the point of maximum negotiating leverage to insert a few phrases or sentences that can make a material difference in the overall transaction. Experienced professional advisers have a highly useful role to perform, and a wise seller will take full advantage of this important opportunity to maximize its strategic transaction position and thereby put more dollars in its pocket.”
As you approach your exit and consider all the documents you will need to create/approve/sign, be sure that any LOI you sign is crafted with protections for you as the seller. Since you will be effectively taking your company off the market for a period time, given the risks and ramifications, be sure the LOI you countersign has safeguards protecting you.
Bottom-line: The M&A process is extremely complex. The LOI is just one example of something you need to know about how to exit your company for maximum profit.
The good news is that we offer a way to learn more. Our complimentary exit planning conferences are led by seasoned, experienced M&A professionals, many of whom have successfully sold multiple companies during their careers. I would advise any business owner who is contemplating an exit in the next 1-5 years to attend one of our conferences to learn how to prepare for the complexities associated with your eventual exit.
Interested in learning more? Use the following links to discover how you can use our services to prepare you for what you need to know about a successful exit (and the documentation critical to this process):
By Carl Doerksen, Director of Corporate Development at Generational Equity.
© 2019 Generational Equity, LLC. All Rights Reserved.
Michael worked tirelessly, He followed every lead meticulously and urgently to make sure nothing was missed.Robert Evans, President and CEO of Mealtracker Dietary Software
We will highly recommend Generational Equity and Musa Jagne to any business owner about to embark on the same process.Karen S. Williams, CFO, BW Manufacturing
We were happy to see the interest in our company and what we cherished has not just a valuable company but an important company to the communities we served in.Larry Moore, Owner, A Company Portable Restrooms
Thank you again for all your guidance and support. Any company will achieve what they intend, if they have you on their team!Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
I wanted to write you a quick letter to express our appreciation and our delight on the outcome of helping us through the process of our recent sale. We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Terry D. Wickman, President, Keytroller
We thank you Eric and Generational Equity making our dream come true.Larry Moore, Owner, A Company Portable Restrooms
We knew it would be a difficult task to have someone really understand our business and our market, prior to researching a possible buyer, so it was imperative that we found someone of your caliber, with definite proven experience in this area.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.Ralph Noblin, President of Noblin & Associates
Generational Equity’s assistance was invaluable in compiling and marketing our business.Bil MacLeslie, CEO, ipHouse
We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
We are extremely pleased with the way Generational Equity handled the sale of our company. Your associates, Tom and Chris, did an outstanding job of getting us (me) through the process.Michael J Polarek, President, Paragon Packaging
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).Bil MacLeslie, CEO, ipHouse
I couldn’t have asked for a better team than Michael and Deborah. We couldn’t have done it without them.Robert Evans, President and CEO of Mealtracker Dietary Software
I quickly recognized that Don was working for Sharpe Mixers above all else, and held our interests above others.Jay Dinnison, Owner of Sharpe Mixers
Thanks again Phil and feel free to have a future client call me if they would like a referral. You are a true professional!Andy Graham, Vice President, Modern Heating & Plumbing
I must say that I have never worked with a more driven, competent and focused individual as Don Ho.Jay Dinnison, Owner of Sharpe Mixers
Bruce and I wanted to take this opportunity to thank Generational Equity for assigning Musa Jagne to our transaction. In Bruce’s words, “Musa did one hell of a job for us!”Karen S. Williams, CFO, BW Manufacturing
The process was much more involved than I expected and your help, experience and advice was a big factor in making the negotiations go as smoothly as possible.Terry D. Wickman, President, Keytroller
Tom Staszak is one of the most professional people I have dealt with in my last forty years of business. You’ve got a great group of people and you have built a truly professional organization.Michael J Polarek, President, Paragon Packaging
The help you provided us during each step of this process made us feel very comfortable and confident we were selecting the right approach to transition our Company.Andy Graham, Vice President, Modern Heating & Plumbing
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.Bil MacLeslie, CEO, ipHouse
Greetings Mike. Thank you for the captivating and compelling presentation you made at the Phoenix presentation last week. Over many years in business yours was the most informative and well-presented presentation, on any subject, that I have ever attended! Your energy and enthusiasm combined with your concise and captivating support of your positions with easily understood examples and data was compelling.Pete L.
The information we learn from customers helps us personalize and continually improve your experience. Here are the types of information we gather.
We receive and store any information you enter on our Web site or give us in any other way. We do not sell or rent your personal information to others without your consent. We use the information we collect only for the purposes sending promotional information, enhancing the operation of our site, serving advertisements, for statistical purposes and to administer our systems. We DO NOT use third parties to provide customer service, to serve site content, to serve the advertisements you see on our site, to conduct surveys, to help administer promotional emails, or to administer drawings or contests, but reserve the right to do so in the future without advance notice.
By submitting my name electronically and clicking the “submit” button, I understand that I am providing Generational Group, Inc., Generational Equity, LLC, Generational Capital Markets, LLC, DealForce LLC, their affiliates, representatives, contractors, etc. (“Generational Group”) my telephone number, which may include a number that is wireless and/or a number that is on a national, state, or other Do Not Call registry or list. I hereby consent and agree to receive telephone calls including any autodialed and/or pre-recorded telemarketing calls and/or text messages (telemarketing) from or on behalf of Generational Group at the telephone number provided. I further consent and agree that telephone calls may be made using automated technology such as an automatic telephone dialing system, artificial or prerecorded voice, or SMS text messaging. Consent is not a condition of purchase. I further warrant and represent that any telephone number provided is not on any state or national Do Not Call Registry and that by agreeing to these terms and conditions that if any number provided is on any such registry, I hereby consent and agree to receive telemarking calls and/or communications including any phone calls, text messages, URLs, links, emails, etc. to the telephone number(s) and/or any e-mail addresses provided. I understand that by entering my name in the electronic form provided, that I am signing my name as equally as if it was my handwritten signature and that it is my intent to provide an “electronic signature” as that term is defined in state and federal law, as well as industry practices for e-commerce.
For reasons such as improving personalization of our service, we might receive information about you from other sources and add it to our account information.
Generational Group may license the use of its intellectual property including but not limited to its name, likeness, and logo for the use of affiliated offices. Such affiliated offices may not be owned, controlled, managed, supervised or staffed by employees, officers, or agents of Generational Group. Affiliated offices may be independently owned and operated. For more information about a particular office, please contact Generational Group at its office in Dallas, Texas.
This page may contain other proprietary notices and copyright information, the terms of which must be observed and followed.
Information on this web site may contain technical inaccuracies or typographical errors. Information may be changed or updated without notice. Generational Group may also make improvements and/or changes in the products and/or the programs described in this information at any time without notice.
Generational Group does not want to receive confidential or proprietary information from you through our web site. Please note that any information or material sent to Generational Group will be deemed NOT to be confidential. By sending Generational Group any information or material, you grant Generational Group an unrestricted, irrevocable license to use, reproduce, display, perform, modify, transmit and distribute those materials or information, and you also agree that Generational Group is free to use any ideas, concepts, know-how or techniques that you send us for any purpose.
Our computer system protects personal information using advanced firewall technology.
Information Generational Group publishes on the World Wide Web may contain references or cross references to other products, programs and services that are not announced or available in your country. Such references do not imply that Generational Group intends to announce such products, programs or services in your country. Consult a Generational Group representative for information regarding the products, programs and services which may be available to you.
Generational Group makes no representations whatsoever about any other web site which you may access through this one. When you access a non-Generational Group web site, please understand that it is independent from Generational Group, and that Generational Group has no control over the content on that web site. In addition, a link to a non-Generational Group web site does not mean that Generational Group endorses or accepts any responsibility for the content, or the use, of such web site. It is up to you to take precautions to ensure that whatever you select for your use is free of such items as viruses, worms, Trojan horses and other items of a destructive nature.
IN NO EVENT WILL Generational Group BE LIABLE TO ANY PARTY OR ANY DIRECT, INDIRECT, SPECIAL OR OTHER CONSEQUENTIAL DAMAGES FOR ANY USE OF THIS WEBSITE, OR ON ANY OTHER HYPERLINKED WEBSITE, INCLUDING, WITHOUT LIMITATION, ANY LOST PROFITS, BUSINESS INTERRUPTION, LOSS OF PROGRAMS OR OTHER DATA ON YOUR INFORMATION HANDLING SYSTEM OR OTHERWISE, EVEN IF WE ARE EXPRESSLY ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
Furthermore, all information contained within this website is the property of Generational Group.
Honored to win Investment Banking Firm of the Year 3 years running.
Over 50 awards and counting.
Sign up to receive regular email updates, industry-leading insights and details on complimentary M&A executive conferences in your area from our award-winning team
Success, you have been added to our list.