If you are interested in either buying or selling a business, it is important to know what lies ahead of you in the process. Both sides will spend a significant amount of time dealing with offers and negotiations. As such, you should understand the documents surrounding the deal making process. Two critical pieces of any Mergers & Acquisitions (M&A) transaction are the Letter of Intent (LOI) and the purchase agreement.
What is a Letter of Intent?
An LOI is the primary method of presenting a deal and opening negotiations. It is a written, non-binding document that outlines, in principal, the buyer’s intent to purchase a business and specifies the price and terms of the transaction. It also includes details such as the assets to be purchased, assumed liabilities, terms of the seller’s non-compete agreement, a timeline for due diligence and closing, a confidentiality provision and often an exclusivity provision as well. The LOI is in effect, a roadmap for the buyer and seller to get through the due diligence process. Once this process is complete, the items in the LOI become an outline for the final purchase agreement.
Benefits of a Letter of Intent
LOIs can help save time and money by putting all of the important deal terms in writing therefore minimizing misunderstandings and conflicts later in the process. Purchase agreements are much longer, costly and difficult to draft. Ideally, you would only want to create one when finalizing negotiations, not every time you begin them. Experienced buyers will not spend a lot of time and money going into due diligence, without an exclusive right to buy the company. Having an LOI reassures them someone else will not purchase the company during due diligence. From the seller’s standpoint, they get reassurance that a buyer is serious before allowing them to get in-depth information about the business. It also helps them to see the potential outcome of a completed sale. Even if negotiations fall apart, the LOI may help the seller gain knowledge that can help them with the next buyer.
What is a Purchase Agreement?
A purchase agreement is the fully fleshed out version of the LOI, in more detail. It also typically includes modified, or additional terms, based on negotiations resulting from the buyer’s due diligence. Purchase agreements should have well-written definitions to spell out exactly what all of the terms mean. They include execution provisions, such as the purchase price, payment information, escrows, price adjustments and information about potential earnouts.
Purchase agreements have a section specifying representations, warranties and schedules, in which the buyer asks the seller to state that certain conditions or facts are true at the time of sale. This can contain a whole slew of items such as the accuracy of financial statements, the existence of contracts, the condition of physical property and assets. It is in the seller’s best interest to avoid making statements that can open them up to liability issues later on. The Indemnification section will further specify who is liable for certain issues after the deal closes, as well as the length of the liability period, and caps on any potential damages.
The agreement also includes a section for interim and post-closing covenants, which dictate how each party is supposed to act during and after the transaction. This can include restrictions on new hires, salary increases, or purchases over a certain amount, to name a few. They can also specify confidentiality or non-compete agreements. Finally, the purchase agreement includes conditions either side has to meet prior to closing and specifies any break-up fees that either party would have to pay for terminating the deal.
Seller Tips for Purchase Agreements
Negotiating a purchase agreement can be time-consuming and stressful, but it is critical that you don’t let the process compromise your ability to run your business. Keeping the business performance well and sticking to a budget is crucial during the due diligence phase, where buyers will be scrutinizing everything. Maintaining or exceeding status-quo, you will give you an advantage in negotiations. Balancing the execution of your transaction with running a business can significantly divide your time and make you susceptible to costly errors. To avoid this, consider hiring a business broker to manage your transaction. They can be a buffer between you and the buyer and allow you to run your business while they manage negotiations based on your specified terms.
M&A transactions come with a lot of terms and negotiating points. A well drafted LOI will help both buyers and sellers by streamlining the transaction process and increasing the probability of success by providing a blueprint for getting to closing. As a seller, if you continue to run your business without allowing the sale to compromise your day-to-day operations, you will have leverage in negotiations after due diligence, and be able to close on your terms.
Are you thinking about selling a business in Fort Myers, Naples, Sarasota or any other part of Southwest Florida? Having someone to assist with your transaction could allow you to continue to run your business and avoid errors that could cost you in negotiations. Corporate Investment Business Brokers (CIBB) can help you to screen buyers and formulate an LOI and eventual purchase agreement based on your terms. Allow us to help you find a buyer for your business and manage the transaction so you don’t have to. The process begins with a free no-obligation consultation and business valuation estimate. Contact us to get started.
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