How to Prepare for the Buyer's Letter of Intent

Mar 18, 2013

Selling your business might be years away, but it’s not too early to find out what the process involves. When selling an attractive business, you have leverage—but only up to the point where you sign a letter of intent (LOI). Most LOIs include a ‘no shop’ clause that requires you to terminate discussions with other potential buyers while your newfound suitor does due diligence.

After you sign the LOI, however, the balance of power in the negotiation swings heavily in favor of the buyer, who can drag out the process of investigating your company. At the same time, with each passing day, you will likely become more psychologically committed to selling your business. Savvy buyers know this and can drag out due diligence for months, coming up with things that justify lowering their offer price or demanding better terms.

With your leverage diminished and other suitors sidelined, you are then left with the unattractive options of either accepting the inferior terms or walking away.

7 Things You Can Do to Prepare for Winning the LOI Game

  1. Make sure your customer contracts have ‘successor’ clauses. Have customers sign long-term, standardized contracts, including a clause stating that the obligations of the contract survive any change in company ownership.
  2. Nurture and prepare a group of customers and vendors as references. Acquirers will want to ask them why they do business with you and not your competitors.
  3. Insure that your management team is all on the same page. Acquirers will want to interview your managers without you in the room to find out if everyone is pulling in the same direction.
  4. Consider getting audited financials. An acquirer will have more confidence in your numbers and will perceive less risk if your books are audited by a recognized accounting firm.
  5. Disclose your company’s risks up front. Address yours before putting your business in play and disclose those that still remain.
  6. Negotiate down the due diligence period. Most acquirers will ask for 60 or 90 days to complete their due diligence. Negotiate this down to 45 days or less. This alerts the acquirer that you are not willing to see the diligence drag out past the agreed-to close date
  7. Retain a mergers and acquisitions firm to represent you in the sale of your business. This alerts the buyer that they are not the only suitor and that you are seeking the best terms through an auction process run by your M&A advisor. Savvy sellers know that “one buyer is no buyer”.

 

Call us today at 214-692-9192 to learn more about how to start preparing for the day when work is just an option.

This post was co-authored by John Warrillow and Joan M. Ridley, CEPA, CBI, CFP™



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Joan M. Ridley, CBA, CEPA, CFP™

Joan RidleyPresident of Business Wealth Solutions, a business consulting firm.

"We have identified numerous opportunities to protect and maximize corporate wealth both now and in preparation for ownership transition. In this economy, human and intangible capital are major corporate assets. Absent proper planning, business owners could leave dollars on the table, and face the risk of actually losing their unprotected assets and hard-earned wealth."



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