When you’re selling your business, a letter of intent (LOI) is when you know it’s getting serious. This is the document a buyer will ask you to sign after verbal negotiations, but before moving forward with the transaction. If selling your business is like dating, getting an LOI is kind of like getting a ring. It’s a signal that things are serious, but it’s also just the beginning.
So what’s in an letter of intent and what does it mean?
Buyer and transaction identification – The LOI names the players and explains what they’re doing. Usually, the buyer is an operating company or a new holding company created for the transaction. The LOI will also state whether the transaction is a stock or asset deal. Both of these have different tax implications and due diligence, so it’s an important detail. The LOI will also outline what assets and liabilities are being purchased and if there are any assets that aren’t part of the transaction.
Price and consideration – Of course, the LOI includes some important numbers. It outlines the purchase price and how you will get paid. You may be hoping for all cash at closing, but that’s generally rare as usually there is some holdback or seller terms. The consideration may be cash, in the form of equity in the company that’s purchasing your business, a seller note, or an earn-out.
Conditions precedent – Usually, buyers have a number of conditions that will need to be met before closing. Those are outlined in the LOI. Conditions might be delivery of a minimum amount of non-cash working capital or an appraisal of certain assets. Basically, the buyer wants to substantiate the tangible net assets and minimize the amount of goodwill they pay.
Due diligence – The LOI signals the beginning of official due diligence. The buyer’s goal with this process is to vet valuation assumptions, confirm what you’ve told and provided the buyer, identify opportunities for increasing revenue after the sale, and find any pitfalls that may decrease the selling price. The LOI may list some documents that the buyer requests from the seller, but it is most likely just the beginning of the research portion of the transaction.
Timing and closing – Finally, the LOI will outline the timeline for the transaction. For a seller, a quick close is ideal. Experienced buyers can often close a deal 60 to 90 days after the LOI is signed. However, a more common timeline is 90 to 120 days. Usually you are agreeing not to talk to other players during this time. The LOI can list milestones like delivery of due diligence, receipt of the asset purchase agreement, receipt of employment agreements, and the targeted closing date. This timeline should be shared with the entire deal team in order to avoid delays.
The letter of intent signals that the sale process is starting in earnest. From the LOI on out, both the buyer and the seller need to be actively engaged, as both sides will be spending money. After all, you’re committing to see the purchase through. And getting from here to there takes a lot of work.
Sellers shouldn’t take the letter of intent lightly. Of course, you can back out if something in due diligence doesn’t check out. But if you back out without good reason, it could signal to future buyers that you aren’t serious about selling your business.
The LOI is when many business owners realize just how serious and time-consuming a sale can be. If you get this far without a mergers and acquisitions consultant, it’s not too late to bring in a professional. O’Keeffe & O’Malley can jump in and make sure your LOI – and the sale itself – will benefit you. Call us at 913-648-0185 for a confidential meeting.