Step
3 - Finding & Qualifying Buyers
The
Letter Of Intent
A
Letter Of Intent, or LOI, is an "intermediate" document
drafted and submitted to you by the buyer.
I
say intermediate, because it is not the final contract. But
it spells out the major elements of the sale the buyer
and seller have agreed to so far. Typically,
you will accept a Letter Of Intent and then enter into a period
of exclusive negotiations with just one buyer.
The
Elements Of The Letter Of Intent
Selling
Price & Terms
- Amount of cash down, interest rate and term as well as description
of the security the buyer is providing the seller.
Structure
- Is it an asset or stock sale? How is the sale price allocated
among different elements of the sale such as non-compete clause
and goodwill (this is important for tax reasons and is discussed
in the next section)
Deadlines
- How much time is the buyer requesting to complete the due
diligence process and what is the proposed closing date? The
buyer may also place a time limit (usually a week) on the
seller to accept or decline the LOI itself.
Contingencies
- The buyer's offer is contingent upon certain keys facts
being confirmed. One example may be confirming that the current
lease is transferable to the new owner. Also, their willingness
to buy is contingent upon the due diligence period confirming
that everything you have stated about the business is true.
Some
Facts to Keep in Mind About The Letter Of Intent
1.)
Don't accept an LOI that grants the buyer exclusive negotiation
rights unless the Due Diligence period is short. 10-20
days of DD is sufficient for most small businesses. Some
buyers will ask for exclusivity and a 2 month DD period.
Your other prospects will eventually lose interest, leaving
you with just one buyer. Then your one buyer will start asking
for all sorts of concessions from you.
2.)
Some buyers will want to skip the LOI and instead submit a full
purchase contract. They figure, why should they pay their lawyer
to draw up both documents. But a purchase contract requires
a significant amount of time and attorneys fees to draft.
Once the buyer has made this big investment in legal fees, it
puts a lot of pressure on them that is detrimental to
the negotiating process.
Better
to encourage them from the start to go the LOI route.
3.)
Hopefully, by this point you have developed more than one
prospect. If you receive LOI s from more than one prospect don't
just accept the one with the highest price. Be sure to take
into account all the details of the offer as well as
the qualifications and background of the buyer. This
is especially true if you are financing part of the sale - getting
a slightly higher price from a weaker buyer who runs
the business into the ground and then doesn't pay you is of
no benefit.
4.)
It is perfectly all right to negotiate the contents of
the LOI with the buyer before you have accepted it
If
your most qualified prospect submits a Letter Of Intent
that includes a lower price and more generous terms than you
had wanted or a less qualified buyer has submitted a more
attractive LOI, then now is the time to negotiate
with the stronger prospect.
It's almost impossible to improve the deal once you
have accepted (by signing) the Letter Of Intent. However,
the buyer may find reasons to re-negotiate the price down
during the due diligence phase.
The
Letter Of Intent you accept will be the best deal you
will ever get.
As
we stated in the previous section: your Selling
Memorandum, your recast financials, all your follow
up communications with buyer and your tour of the facilities
should all serve to justify your asking price. If the
buyer has any objections or concerns about you asking price
you want them to express them sooner rather than later.
Never
be afraid to hear negative feedback or objections
from the buyer - it means you will always know where you stand
and gives you a chance to deal head on with their objections.
And as far as disagreements over price go, the time to deal
with them is before you accept the Letter Of Intent.
NEXT:
Step
4 - Negotiate And Structure The Details Of The Sale
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