7 Things to know between an LOI and Binding offer in
selling your business
02/15/19
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President, MP LLC
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Receiving a Letter of Intent (LOI) when selling your business is exciting for any business owner or entrepreneur. However, you don't need to scream "SUCCESS" just yet - there are some critical aspects to the LOI process that need critical attention! The LOI encompasses many steps that require patience, give-and-take negotiations, and strategy to turn the non-binding LOI into a binding offer. Here are 7 things you need to be aware of and get comfortable with between receiving an LOI and the actual closing of the transaction:
1. Make sure you understand every word and detail of the LOI and fully grasp all the legal language.
First, make sure the LOI has all the detail you are looking for - the offer, contingencies, and expectations of current owners (earn-outs, post closing expectations, etc.). If the details are not there, you might have a "half-in" distracted buyer. It's OK to ask for more specifics to fulfill your expectations. What you don't want is miscommunication that leads to misunderstanding that ends up destroying the deal after you have invested time and money attempting to close it. The interpretations within the LOI set the tone for the rest of the process so it is critical that it's right and that you don't leave critical aspects to assumptions.
2. Keep your focus on the business - on budget and within revenue targets
Do NOT get distracted with the many activities specific to the sale of a business. It is very easy to do. Deals can fall through when an owner(s) takes attention off the business, especially between receiving the LOI and when the actual closing occurs. Although it may take a great deal of focus to close the deal, the operator must keep the business running according to the projected targets laid out in the CIM document. It is the most critical element in making the buyer comfortable with your longer term sales projections. A potential buyer with an LOI will be watching every aspect of your business at a high level of scrutiny. When the monthly and quarterly financials come in as projected, the buyers trust and comfort level increases which sky-rockets the probability of success in closing the deal.
It goes without saying that if you miss your financial targets, the buyer is forced to re-open their due diligence to define whether or not the financial miss is a one-time blip or a much larger negative shift in the business. This is simply why your focus must stay on the heart strings of your operation vs. dancing your way through why your projections weren't fulfilled. From the LOI stage to closing, keep your business within the same operating parameters. Do not try and integrate new strategies, new products, new divisions, or even a new strategy the buyer might have mentioned. Hold off on any changes until after the close unless you have specifically discussed the change with the buyer. As you know, hitting the moving financial target projections you have already disclosed to the buyer is a big enough challenge!
3. Be up front immediately - no matter how bad it hurts!
Most entrepreneurs I have met over the years are honest, hard-working competitive people. However, the competitive part sometimes works against the entrepreneur. No one likes to lose, confess a screw up, or certainly admit the projections you worked so hard in producing are not going to come in as predicted. Most buyers know business results are not perfect and/or on budget. Be up-front and inform the buyer immediately if something goes wrong within your business. It is the right thing to do, it builds trust with the buyer, and proves your ethics & principles as a business owner. If you attempt to cover it up and fail in doing so, expect the deal to fall through.
4. Know your past financials inside and out.
Most buyers will perform a thorough Q&A during their due diligence with both your Controller/accountant and owner(s). The buyers intent is to review, in detail, the financial statements that you have previously presented to make sure the earnings presented are correct. It is normal for a buyer to find conflicting data that might help or hurt your profitability. Know every aspect of your major monthly entries. Know your chart of accounts and what expenses are represented. Know that the buyer is going to walk in with a list of questions they have concerning the numbers you have given them - keep calm, cool, and professional. Getting defensive or animated only throws up red flags.
5. Be organized.
Be proactive and ask the buyer what their expectations are during their due diligence. You can either provide a list of items you have prepared or are in the process of doing so. Most buyers will ask for detailed financials, the business legal documentation, insurance and past claims, HR files, customer lists, significant contracts & terms, and a list of new and expiring contracts just to name a few. Proactively providing organized information to the buyer shows professionalism and allows the buyer to appreciate how the company is well managed and organized. The buyers confidence will be rock solid.
6. Manage the lawyers — don’t let them manage you. Ugh!
This is where I stop and have to take a deep breath in trying to make this point as concise as possible. The lawyers work for you - not the other way around. Most lawyers are all about getting everything they can in the final purchase sale agreement (PSA). They view their job as doing everything they can to protect you, so they will always take the most conservative path and recommend the most protected, conservative position. Here's the problem - expect the buyer's side to do the same thing. The result is simple: no room to find a middle ground that makes sense for both sides. So, while the lawyers run the billed hours through the roof going back and forth on language, it will be up to you to get the deal done by defining the middle ground with the buyer. The best way to do this is without the lawyers. This goes back to my second sentence above - the lawyers work for you so give them the specifics you want covered and tell them to get it done within a certain time constraint - period. You must have the confidence to tell them what you want, make the final business decisions around the best deal you feel can be obtained, and not let the lawyers manage you. Lawyers can be tricky to manage, but it's critical you do so.
7. Communicate thoroughly with all involved in the sale process.
Before communicating anything to the buyer side, think it through twice, keep your emotions in check, and don't send an email when a phone call is best (or vise-versa). Your professional demeanor will shine through - good or bad - in how you decide to communicate with the buyer direct, or through their attorney or due-diligence team. Firing off unprofessional short emails right after a crying employee left your office doesn't help your cause or perception. Know that everyone within the process is usually uptight, stressed, or excited to some degree. Making sure to communicate at the right time via the best method possible will define the relationship between you and the buyer while everything stays on track for your trip to celebrate in the Bahamas!
1. Make sure you understand every word and detail of the LOI and fully grasp all the legal language.
First, make sure the LOI has all the detail you are looking for - the offer, contingencies, and expectations of current owners (earn-outs, post closing expectations, etc.). If the details are not there, you might have a "half-in" distracted buyer. It's OK to ask for more specifics to fulfill your expectations. What you don't want is miscommunication that leads to misunderstanding that ends up destroying the deal after you have invested time and money attempting to close it. The interpretations within the LOI set the tone for the rest of the process so it is critical that it's right and that you don't leave critical aspects to assumptions.
2. Keep your focus on the business - on budget and within revenue targets
Do NOT get distracted with the many activities specific to the sale of a business. It is very easy to do. Deals can fall through when an owner(s) takes attention off the business, especially between receiving the LOI and when the actual closing occurs. Although it may take a great deal of focus to close the deal, the operator must keep the business running according to the projected targets laid out in the CIM document. It is the most critical element in making the buyer comfortable with your longer term sales projections. A potential buyer with an LOI will be watching every aspect of your business at a high level of scrutiny. When the monthly and quarterly financials come in as projected, the buyers trust and comfort level increases which sky-rockets the probability of success in closing the deal.
It goes without saying that if you miss your financial targets, the buyer is forced to re-open their due diligence to define whether or not the financial miss is a one-time blip or a much larger negative shift in the business. This is simply why your focus must stay on the heart strings of your operation vs. dancing your way through why your projections weren't fulfilled. From the LOI stage to closing, keep your business within the same operating parameters. Do not try and integrate new strategies, new products, new divisions, or even a new strategy the buyer might have mentioned. Hold off on any changes until after the close unless you have specifically discussed the change with the buyer. As you know, hitting the moving financial target projections you have already disclosed to the buyer is a big enough challenge!
3. Be up front immediately - no matter how bad it hurts!
Most entrepreneurs I have met over the years are honest, hard-working competitive people. However, the competitive part sometimes works against the entrepreneur. No one likes to lose, confess a screw up, or certainly admit the projections you worked so hard in producing are not going to come in as predicted. Most buyers know business results are not perfect and/or on budget. Be up-front and inform the buyer immediately if something goes wrong within your business. It is the right thing to do, it builds trust with the buyer, and proves your ethics & principles as a business owner. If you attempt to cover it up and fail in doing so, expect the deal to fall through.
4. Know your past financials inside and out.
Most buyers will perform a thorough Q&A during their due diligence with both your Controller/accountant and owner(s). The buyers intent is to review, in detail, the financial statements that you have previously presented to make sure the earnings presented are correct. It is normal for a buyer to find conflicting data that might help or hurt your profitability. Know every aspect of your major monthly entries. Know your chart of accounts and what expenses are represented. Know that the buyer is going to walk in with a list of questions they have concerning the numbers you have given them - keep calm, cool, and professional. Getting defensive or animated only throws up red flags.
5. Be organized.
Be proactive and ask the buyer what their expectations are during their due diligence. You can either provide a list of items you have prepared or are in the process of doing so. Most buyers will ask for detailed financials, the business legal documentation, insurance and past claims, HR files, customer lists, significant contracts & terms, and a list of new and expiring contracts just to name a few. Proactively providing organized information to the buyer shows professionalism and allows the buyer to appreciate how the company is well managed and organized. The buyers confidence will be rock solid.
6. Manage the lawyers — don’t let them manage you. Ugh!
This is where I stop and have to take a deep breath in trying to make this point as concise as possible. The lawyers work for you - not the other way around. Most lawyers are all about getting everything they can in the final purchase sale agreement (PSA). They view their job as doing everything they can to protect you, so they will always take the most conservative path and recommend the most protected, conservative position. Here's the problem - expect the buyer's side to do the same thing. The result is simple: no room to find a middle ground that makes sense for both sides. So, while the lawyers run the billed hours through the roof going back and forth on language, it will be up to you to get the deal done by defining the middle ground with the buyer. The best way to do this is without the lawyers. This goes back to my second sentence above - the lawyers work for you so give them the specifics you want covered and tell them to get it done within a certain time constraint - period. You must have the confidence to tell them what you want, make the final business decisions around the best deal you feel can be obtained, and not let the lawyers manage you. Lawyers can be tricky to manage, but it's critical you do so.
7. Communicate thoroughly with all involved in the sale process.
Before communicating anything to the buyer side, think it through twice, keep your emotions in check, and don't send an email when a phone call is best (or vise-versa). Your professional demeanor will shine through - good or bad - in how you decide to communicate with the buyer direct, or through their attorney or due-diligence team. Firing off unprofessional short emails right after a crying employee left your office doesn't help your cause or perception. Know that everyone within the process is usually uptight, stressed, or excited to some degree. Making sure to communicate at the right time via the best method possible will define the relationship between you and the buyer while everything stays on track for your trip to celebrate in the Bahamas!
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Scott E McGlon is the President of McGlon Properties, LLC and the author of many blog post on MP Blog. He has been a serial entrepreneur, entrepreneur-in-residence, investor, and president/CEO of many successful start-ups since 1998.
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