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Letter of Intent: Explained

2 February 2022

In our last post, we discussed finding a buyer for your closely-held business (read it here). Now, assuming you’ve found a suitable candidate who would like to purchase your business, what is your next step?

It is the crafting and drafting of the letter of intent between you and the potential buyer. This is a legal document, which should be drafted by an attorney who specializes in business transactions. If you need a referral, give us a call – we have worked with many excellent attorneys, and will be happy to recommend one to you. The main things a letter of intent typically sets forth include:

  • The agreed-upon purchase price for your business
  • Limitations and conditions
  • Representations and warranties
  • Confidentiality statement and non-disclosure agreements
  • Conditions which must be satisfied by both seller and buyer before the sale can be finalized
  • How will the purchase price be paid? Stock in the buyer’s company? Cash? A combination? How will payment be structured?
  • Will there be an earn-out involved?
  • What liabilities the buyer will assume, and which (if any) will remain the responsibility of the seller
  • What due diligence will be performed, and the time frame for this process
  • The timing of the first draft, second draft, and final draft of the purchase agreement
  • Any transitional assistance you have agreed to provide to the buyer, and whether this will come before or after the transaction’s close
  • An exclusivity, or “No Shop,” clause
  • Any other significant conditions to the sale, such as provisions pertaining to retention of your employees, third-party consent(s) required, etc.

Fellow-entrepreneurs, don’t do this yourself. You are great at growing and running your business, but for this you need the skills and input of your expert Transaction Advisory Team. Your attorney (preferably well-versed in business sales/purchases and transactions), your financial advisor (choose one who, like RFG, is experienced in the Transaction Advisory process) and/or other members of your Advisory Team should do the heavy lifting on this for you.

Some business owners do try to prepare the letter of intent themselves; far more often than not, they leave out key specifics, to be solidified later in the process. This helps the buyer, but it’s not good for you – the best time for a seller to obtain concessions from a potential buyer is at the start of the process, when the buyer is still in the position of competing for the right to purchase your business, not later, when you have agreed not to solicit competing offers – at least, temporarily.

Your Transaction Advisory Team can help determine (among other things):

  • Allocation of the purchase price
  • Which provisions within the letter of intent should be binding, and which should not
  • The conditions under which you and your buyer can terminate the transaction
  • How to negotiate with a potential buyer, should the buyer’s due diligence discover factors of concern which could affect the purchase price
  • What due diligence will be done by the buyer and by you, how will it be done, and the time-frame for completion, with the due diligence broken down into individual tranches or phases to be completed sequentially
  • How will debt be treated? Will the buyer assume your business’ debt, or will you pay it off with the proceeds from the sale?
  • If real estate is involved in the sale, that creates another set of issues, so if this is the case with your transaction, make sure your Transaction Advisory Team includes an expert real estate attorney
  • The general guidelines for structuring the transaction
  • How much protection, if any, your employees’ positions will have, and the form that protection will take
  • Third-party consent(s) – if your business leases its space, your landlord may require his/her approval before accepting a new tenant
  • Purchase contracts with major vendors which may also require third-party consent
  • The details of the exclusivity clause – how long will this provision be in force, under what conditions it can become null and void, etc.
  • The timing on the drafting of a Purchase Agreement, following the completion of due diligence

The above represents some of the important factors which should be considered, but is by no means an exhaustive list of the specifics to be covered in crafting a letter of intent. Each business represents a unique entity, each sale a unique transaction. You need a unique letter of intent tailored to the details of your particular transaction.

When it comes to the sale of the business you’ve spent your life building, put together the best Transaction Advisory Team you can find, and trust their guidance. It will pay off in the end.

If you are considering a potential sale of your business, I recommend strongly that you consult with us before making any final decisions.

Please click here to let me know how I can help you.

Until next time –

Peace,

Eric

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