During my career as a business and estate planning attorney focused on entrepreneurs and executives, I have advised many business owners on the sale of their companies. In order to effectively sell your business, there are several steps to follow that ensure a fair transaction, as well as the provision of points of negotiation between each party, the buyer and the seller.
In my new series, Selling Your Business, I’ll take you through some of the typical twists and turns of selling a company, common to transactions of practically any scope or complexity. The first step that buyers and sellers of businesses usually take is executing a letter of intent, also referred to in short-hand as an LOI. The letter of intent outlines the most basic terms of the sale transaction, and the document is usually initiated by the buyer, much as an offer to purchase is made in consumer transactions like real estate purchases.
It’s important to note that LOIs are non-binding—in a commercial purchase, the actual binding offer to purchase comes later—but are simply made to formally advise the seller of the buyer’s seriousness and initiate due diligence.
Generally, letters of intent are non-binding agreements that allow the purchaser to review the revenues, expenses, and operations of a business before proceeding with a formal contract. Letters of intent letters of intent outline the terms of the purchase and what the buyer needs from the seller in order to perform due diligence. Once the seller signs the LOI and the buyer completes due diligence, the agreement moves to executing a legally binding contract.
When you’re selling your business, you should expect a letter of intent that properly reflects the scope and complexity of your business, whether you’re a small, family-owned operation or a larger corporation with hundreds of employees. The provisions and allowances of the LOI will address any applicable areas of due diligence, such as inventory, shareholders, book of business/customer contracts, and other contracts like non-competes.
Most letters of intent cover three basic aspects of the transaction: terms and conditions, pricing, and timelines:
- Terms and conditions will typically include details of the structure of the deal, exclusivity (a “no-shop clause” that gives the prospective purchaser time to complete the transaction without competing bids coming in), and obligations of the buyer and seller to complete due diligence necessary to move the transaction forward.
- Pricing will include the sale price of the business, as well as terms for payment and financing, including any applicable seller financing or third-party funding.
- Timelines will apply to the due diligence process, execution of formal purchase agreement, and closing of the transaction, as well as any provisions for scenarios where the transaction may not be completed.
There are advantages and disadvantages for sellers accepting letters of intent, but the positives usually outweigh the negatives. One positive is that LOIs will help the buyer in procuring funding for the transaction. While a no-shop clause has an obvious disadvantage for the seller—effectively taking the business off the market while the buyer conducts due diligence activities—sellers can mitigate the potential loss of time on the market, as well as other hard and soft costs of due diligence, by requiring a deposit with the LOI.
In the next installment of this series, we’ll discuss necessary areas of due diligence that business owners can expect from buyers and their representatives, and how to prepare for these aspects of the transaction. If you are in need of counsel to assist you in the sale of your business, the attorneys of the Forrest Firm are here to help. Contact me at the firm today to get started.