That first meeting with a potential buyer of your business can be both exciting and nerve racking, but afterward, if the buyer’s interest begins to build and the initial review proves to make sense, (both ways you spell sense/cents) a more formal request may emerge to begin the acquisition process: The Letter of Intent.
An Acquisition’s “Letter of Intent”: Putting the Pieces of A Deal Together
Once a potential buyer has reviewed and investigated a possible business acquisition, and has decided to become serious about acquiring the business, the buyer presents a Letter of Intent (“LOI”) to the seller. It is the first step to successfully completing the purchase of a business.
You will discover that this exit process involves a number of moving parts and different transaction advisors (from both sides). It is where the seller begins to experience some of the questions and frustrations that materialize from the crucible of divestiture.
The Beginning of a Deal: A Letter of Intent
The entire Transaction Lifecycle is a sequence of events that solidifies a company’s sale. It includes agreements and milestones created and fashioned from the process’s very beginning – “The Letter of Intent”.
A buyer’s first step, after inquiring about a business, is the execution of a Confidentiality Agreement (“CA”) or Non-Disclosure Agreement (“NDA”) provided by your (the seller’s) Intermediary or Advisor. This is oftentimes followed by the buyer supplying personal information in a “Buyer Profile” or questionnaire. Once both of these documents have been completed and returned to the Intermediary – the “Confidential Business Review” or “Offering Memoranda” is released for the prospective buyer to read and digest. This document contains the history of the business as well as financial statements and an overview of the opportunity.
After reviewing the business, and if the buyer expresses continued interest, a meeting(s) between the buyer and the seller is arranged. Upon review and consideration, if the buyer becomes serious, it is at this stage that a Letter of Intent is submitted outlining the transaction parameters of pricing, terms, and conditions as well as, all the items requested to be investigated during due diligence.
Typically, The Letter of Intent is a non-binding document and it is the first step in constructing the transaction’s foundation.
The LOI becomes, once a buyer and seller mutually agree, the initial framework for transaction attorneys to begin drafting the acquisition’s “Definitive Agreement to Purchase”. The more details provided by participants in the LOI, the better a guideline for attorneys.
In the lower and middle-market space, sometimes a non-binding “Letter of Interest” is initially extended (before a Letter of Intent) which broadly outlines the buyer’s interest, pricing, terms and conditions of a possible transaction.
The Major Items of the Letter of Intent
Below are the typical elements that would be contained in a Letter of Intent. It varies from acquisition to acquisition, depending on the complexity and contains all material items that are included in the transaction.
The Price to be paid
Cash down payment
Financing, if required or involved, either from a third party lender or from the seller, or both
Transition time the seller will be required to stay after the transaction to aid in the transfer of the business
Provisions of a non-compete
Escrow money to be deposited upon acceptance
- Condition of the business at close such as:
- Inventory levels (how much exactly is needed to operate the business)
- Debt Identification
- Retention of Key employees
- Work in progress
- Reconciliation of Receivables and Payables
- Closing Contingencies, such as
- Obtaining Financing Approval from Lenders
- Due Diligence requests
- Obtaining Financing Approval from Lenders
- Transfer of contracts
- Leases or New Lease Approvals
- Transfer of Contracts
- Employment Agreements
In addition, a mutually agreed timeline with identified “markers” helps everyone move toward completion of the acquisition . In other words;
Heard all the kittens up front and move everyone forward from there. It will only save you time, money and aggravation.
Be Prepared: Bring Your Patience
All of the above requests can be substantial in nature and should be thoroughly spelled out by the Buyer and his representatives in the LOI. The more precise the Buyer’s LOI, the easier moving the process forward during and through Due Diligence. Just understand;
When you agree and sign a LOI, it is at that moment you as seller relinquish control and power of the transaction process to the buyer.
The Letter of Intent is but the first step. Prepare yourself for a serious examination of your business, its methodologies, finances, accounting procedures, bank statements, site inspections, inventory review and, depending on the type of business, much more. In other words, the frustrations, aggravations and disappointments may be just beginning.
Patience…. this is just the Letter of Intent; the hard stuff is coming – Due Diligence.