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.
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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 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
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
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.
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.Ralph Noblin, President of Noblin & Associates
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
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
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I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.Bil MacLeslie, CEO, ipHouse
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
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.
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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
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
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
We thank you Eric and Generational Equity making our dream come true.Larry Moore, Owner, A Company Portable Restrooms
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
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.
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
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