Over the years of publishing these M&A pieces, we have discussed how important key documentation is for business owners seeking to complete an M&A event, especially if they are not using the advice of a professional M&A firm like The Generational Group. Some of the key documents we have discussed include:
Today we are going to cover a document that you may not even be aware of unless you have gone through an M&A transaction. The letter of intent (LOI) is vital to completing a transaction. Our friends with Axial (a leading online resource that combines capital providers with business owners) have produced a comprehensive piece on LOIs. This is how they describe the importance of this document:
LOIs set procedures for due diligence … An LOI can be used to set expectations around deal structure, scheduling, and other big picture deal points. Material terms that are essentially deal-breakers can be resolved early.
It is this last sentence that demonstrates the importance of an LOI. Resolving key items via the LOI can prevent deals from collapsing later when unforeseen issues arise. So, your logical next question is: What are material items and how can I determine them in advance? Ah, now you see that is a huge challenge to the uninitiated and a good reason to hire an M&A professional to represent you.
Until you close a few dozen deals and have literally seen nearly every possible “material term,” you will have a hard time anticipating them. Furthermore, if you are negotiating with a savvy, professional, experienced buyer, he/she will most likely craft an LOI that protects their interest more than yours. Is this wrong? No, it is simply a reality. Buyers are going to pay attention to details that impact them, so you need to do the same in the LOI, ensuring that your interests are covered as well.
In essence, an LOI can be used like Switzerland is for banking: a neutral document that can protect both parties. Again, Axial describes it this way:
LOIs help protect all parties in the deal. In order to prevent a bidding war, or to allow the buyer an exclusivity period in which to conduct its due diligence, an LOI can include a “no-shop” clause that prohibits either or both sides from approaching third parties for a limited period of time. Likewise, in order to protect a seller from wasting time, money and effort, an LOI may include a break-up fee that is paid if the buyer cancels the transaction for an unpermitted reason.
You may be tempted to balk at the notion of any sort of fee to be paid if you back out a transaction. However, the key word above is “unpermitted.” Again, if you have never completed a transaction, you are most likely completely unaware of what some of these reasons may be. This is another reason to spend some money in advance and hire an M&A advisor.
There are certainly valid reasons for sellers to cancel a transaction. However, savvy buyers know that these reasons can be limited and strict in detail. You need to be sure that you are very comfortable with the terminology and verbiage used in your LOI relating to break up fees.
Momentum is Key
Finally, a well-executed LOI can not only protect both parties, it can also, in the long run, speed the velocity of a deal up:
LOIs are considered formal legal documents. It is important to differentiate between what parts of an LOI are intended to be enforceable, and what parts aren’t. Examples of enforceable sections include clauses around confidentiality, no-shop, or break-up fees. Although price and terms typically wouldn’t be included among the enforceable provisions, they set an expectation that is difficult to change absent a good reason. If the circumstances of the deal warrant, an LOI can be a valuable tool to save time and money.
There is an old saying in deal making that goes something like this: The longer a deal takes to close, the more the odds go up of something unforeseen happening to scuttle it. So, having a well-thought-out LOI can help both parties close a transaction faster than not having one at all. Again, if you hire an experienced deal maker, the odds are good that he or she will be able to help you anticipate material issues that might arise in advance and thus save a transaction from failing if something does come up out of the blue at the 11th hour.
A good analogy for this is that you see your family physician annually for a physical and you go to a specialist to treat any condition outside of your GP’s practice. The same is true for the eventual sale of your largest asset. Don’t go cheap and try to do it yourself because you will encounter key documents that you have no experience with (such as an LOI) and that may lead to not only you leaving chips on the negotiating table, but it also could lead you to agree to the terms of an LOI that are not in your favor.
My suggestion, if you are considering entering the market on your own, is to first attend a Generational Group exit planning seminar. We hold these no obligation, educational meetings throughout North America for business owners who are interested in learning how and when to exit for maximum profit. Follow these links to learn more:
By Carl Doerksen, Director of Corporate Development at Generational Equity.
© 2021 Generational Equity, LLC. All Rights Reserved.
I need to say an immense thank you to Don Ho for his stellar work ethic, attention to detail, and tireless effort. Also thank you to the whole crew at GE! Without you, Don could not do such a phenomenal job. We were shooting for closing and funding before the end of 2020, due to the uncertainty of the political landscape and taxes. I am happy to report we closed last week and will be funding tomorrow.Dr. Caty J. Catron PhD, RN, VA-BC – Owner, Vic The Picc, LLC
We had the pleasure of working with Mr. Ahmad Behjati Managing Director, M&A, for Generational Equity during our acquisition of Papa's Dodge in late 2021. Generational Equity and Mr. Behjati represented and marketed Papa’s Dodge. As our primary contact, Mr. Behjati was professional in every facet of this acquisition process, conveying valuable advice most times and assisting us in every step of the process.Rick Greene of Dobbs Equity Partners LLC
The professionals at Generational Equity then helped develop a roadmap for enhancing the value of the firm and an evaluation report. This was completed by June 14, 2021. We then developed the Confidential Information Memorandum and put Taylor Studios, Inc. on the market by July.Betty L. Brennan, President, Taylor Studios
Generational Equity’s professional staff helped me every step of the way. Their network and professionals are the only reason I sold my company this quickly. For me this is a once in a lifetime sale and I was unfamiliar with the process. I was able to lean on them with questions and concerns.
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.
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 were represented by Michael Goss with Generational. The due diligence was grueling and exhausting, but Michael propped us up and kept us motivated throughout the process. Debi and I continued to ask each other how we could possibly make it through this process without the assistance of Michael. Michael's professionalism and knowledge is absolutely amazing, and we are so blessed to have had him by our side as we made our future dreams come true.Bob and Debi Lee, Owners of BL Technology, Inc and BL Tl Services, LLC
T.D., thank you so much! You are a great leader! I love how you are using your gifts and talents to better others. You are clearly a GREAT COACH! This 3 day session undoubtedly changed the future of our business, and very well may have been the sole catalyst to save my company, my health and my marriage! A genuine “thank you” from the bottom of my heart.Bryan D. Horn, Owner, Over Under Clothing
Through the sale process, Generational brought in several interested buyers and we closed in about 6 months. I am so glad I accepted that invitation to the conference and could not be happier with the whole process. The team at Generational coupled with their knowledge and guidance was so valuable that in the end, I know I could never have done this on my own!JoAnn Ellis, Owner of Fondren 5 Star Kennels
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.Bil MacLeslie, CEO, ipHouse
I decided to attend the conference and hopefully receive some guidance on how to structure an exit plan of my business. Upon arriving at the conference, I was so impressed with the presentation given by Generational Equity that I set a future appointment that week to discuss the possibility of selling my business with their Senior Managing Director David Robinson.JoAnn Ellis, Owner of Fondren 5 Star Kennels
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.
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
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.Ralph Noblin, President of Noblin & Associates
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
I wanted to take this opportunity to thank you for all that you have done for us. Not only did you take care of all the aspects of the sale but took extra care to make sure we knew what it looked like every step of the way. I will definitely recommend your company to anyone that is in a position to or looking to exit their business.Shane and Johanna Kline, Owners of Vision Upfitters
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
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).Bil MacLeslie, CEO, ipHouse
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.
I am pleased that I was able to work with Andrew Byrd throughout this experience. From the first meeting we had in Minneapolis I felt that I was in good hands. His knowledge and expertise is second to none. He guided the process consistently throughout. I feel lucky that I was pared with Andrew and could not be happier that I chose Generational Equity to handle this major life event. Thank you Andrew and GenEq for everything!Eric Erlandson, Owner, Action Fastenings, 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
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 most important contribution I think Ahmad made was with his personality and work ethic. He is sincere, efficient, and very hard working. He was available to me at all times, whether it was for specific detail of the negotiation or just to talk through the bigger picture. He listened, advised, and recommended, but never forced his idea or opinions. In the time we worked together, he became a valued colleague and also a friend.Salvo Stoch, Founder and CEO of Sleeping Partners
Generational Equity’s assistance was invaluable in compiling and marketing our business.Bil MacLeslie, CEO, ipHouse
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
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
After attending a conference with GE, I decided that the value they bring would be worth the expense and as soon as I started working with them, I realized that was the right decision. When we started to get LOIs, Fred Zweifel took the lead on the communication and supported negotiations throughout the process, which got tricky as we moved forward. I learned that it can be common for companies to make a great offer then work to erode that price with their discoveries, but Fred and the GE team kept that from happening.Caroline Connelly, CEO, OptoTest
Thanks to you, the entire GE team and especially Michael Goss for driving a great valuation, coaching me and driving the process across the finish line. Please let me know if there is anything I can do to support GE going forward. P.S. Given my experience with GE I felt comfortable enough to sign up with Generation Wealth Advisors!Tom Currier, Former President & CEO, Rackmount Solutions
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