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 terms as
well as description of the security the buyer is
providing the seller.
- 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 from
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
Hopefully, by this point you have developed more
than one prospect. If you receive LOIs 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
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
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 your 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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