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10 Items to Include in the Letter of Intent When Preparing to Sell Your Business

Mark G. Metzler, CPA, CGMA, CEPA
Mark G. Metzler, CPA, CGMA, CEPA Director, Audit & Accounting

As an adviser to a multitude of transactions, on both the sell side and the buy side, we have the opportunity to see the seller’s frustration when the price they thought they were to receive has changed. Needless to say, the selling price rarely increases. It sometimes reminds me of shopping for a new car, when the price you expect to pay ends up being significantly different than the reality. How does this happen when selling a business, and what steps can you take to minimize the reduction in your selling price?

When business owners make the decision to exit their business through a sale, they are often eager to obtain a letter of intent (LOI) from the buyer. In the seller’s eyes, the LOI is the commitment that the buyer is serious about purchasing the business and may mistakenly provide the seller with comfort that the fruits of years of hard work will come to bear.

However, if the LOI isn’t specific enough with respect to the proposed purchase details, the seller is often left in an unenviable position that may result in a myriad of emotions, including anger, frustration, and disappointment, not to mention additional professional fees and ultimately a reduced selling price.

To minimize the likelihood that the seller’s expectations will be diminished, our experience has shown that clarifying transaction structure and provisions prior to signing an LOI will lead to a quick, efficient, and successful transaction closing. Essentially, we recommend establishing the owner’s proposed terms of sale and outlining the items that are important into the LOI to avoid any confusion or changes at a later time.

Here are ten key items that should be addressed in the owner’s term sheet:

  1. Nature of the transaction – asset vs. stock sale. In the private company space, asset sales are more prevalent. The seller typically would prefer to sell stock, but the buyer often wants an asset deal.
  2. Identification of purchased and excluded assets. Although we often see a cash-free, debt-free transaction, what, if any, are the working capital requirements?
  3. Identification of any assumed liabilities. This could include lease obligations, software licenses, customer deposits, etc.
  4. Asset allocation. There may be significant tax benefits or costs depending upon how the purchase price is allocated among the acquired assets. It’s best to have an understanding and agreement of the asset allocation upfront.
  5. Timing. How much time is available for due diligence before executing an asset purchase agreement (APA)? What is the timing for closing?
  6. Conditions to closing in the APA. Are financing or similar contingencies permitted? Are any regulatory, landlord, or other approvals needed?
  7. Amount of seller indemnity obligations. Indicate the percentage of purchase price and length of time for general and/or fundamental representations and warranties.
  8. Communications and announcements. It’s vitally important that the seller control communications, and the buyer must not have any discussions with employees, customers, vendors, or landlords without the permission of the seller.
  9. Exclusivity. This prevents the seller from marketing the company to other interested parties. Consequently, this has a significant impact on the seller’s ability to negotiate.
  10. Post-closing transition services. Are transition services required, and what is the term and compensation?

The highest price that the seller will be offered is in the LOI. After the LOI is signed, the buyer constantly chips away at the offering price, as the seller has lost its leverage. Incorporating the above elements into an LOI before it is signed allows the seller to minimize the risk of deal changes that may have significant financial implications to the seller. It will ensure that the selling price is the ultimate price.

The LOI is a critical step in the sale of a business. If you have any questions or would like assistance navigating this process, please contact us.

Mark G. Metzler is a Director with Kreischer Miller and a specialist for the Center for Private Company Excellence. Contact him at Email.  

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Mark G. Metzler, CPA, CGMA, CEPA

Mark G. Metzler, CPA, CGMA, CEPA

Director, Audit & Accounting

Employee Benefit Plans Specialist, Owner Operated Private Companies Specialist, Private Equity-Backed Companies Specialist

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