3 - Finding & Qualifying Buyers
Letter Of Intent
Letter Of Intent, or LOI, is an "intermediate"
document drafted and submitted to you by the buyer.
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.
Elements Of The Letter Of Intent
Price & Terms
- Amount of cash down, interest rate and term as well
as description of the security the buyer is providing
- 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)
- 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.
- 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.
Facts to Keep in Mind About The Letter Of Intent
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
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.
to encourage them from the start to go the LOI
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.
It is perfectly all right to negotiate the contents
of the LOI with the buyer before you have accepted it
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.
Letter Of Intent you accept will be the best deal
you will ever get.
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.
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.
4 - Negotiate And Structure The Details Of The Sale
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