Key Items to Include in a Letter of Intent when Buying or Selling a Business
One of the first significant steps in the route to buying or selling a business is the signing of the Letter of Intent (LOI). The purpose of the LOI is to express certain understandings and agreements between the buyer and seller of the prospective business and can be viewed as the first step in formalizing the negotiation process. The LOI is non-binding contract between the buyer and seller but may include some binding provisions such as an exclusivity period and confidentiality provisions. This document represents the end of preliminary due diligence and the beginning of the formal due diligence process where the buyer and seller will determine whether this company is the right fit.
While the letter of intent should be detailed enough to ensure that the main material issues are brought to light and potentially negotiated early on, it is also important to understand that more detailed discovery’s will happen during the formal due diligence process. During the formal due diligence process additional issues may surface that were previously not outlined in the LOI and may need to be negotiated prior to the final purchase agreement. Generally speaking, the more that is covered in the LOI the smoother the process will tend to go.
It is common that the LOI will be prepared by the buyer’s attorney and presented to the seller’s Business Broker or M&A Advisor. While it is the M&A Advisors role is to manage the negotiations of the purchase price and deal terms of the agreement, it is strongly recommended that the seller engages a transaction attorney to review and approve the agreement prior to execution as the LOI will set the tone for transaction going forward.
While information will vary depending on the business, some specific items to include in the LOI are:
Purchase Price
This section should outline the price offered based on the perceived value of the company, often determined by a multiple of EBITDA as well as many other factors that are specific to the business. Some LOI’s will include an explanation of the assumptions that were used to come to the purchase price. This amount could vary by the time the actual Purchase Agreement is signed and could be subject to change based on various findings during the formal due diligence process. Therefore, including an explanation of the method used could help with any potential adjustments if required. One option to reduce the likelihood of a buyer reducing their purchase price later in the process is to provide additional preliminary due diligence information prior to buyer prior executing an LOI. We have found this especially useful when receiving offers from multiple buyers.
Transaction or Deal Structure
The transaction structure outlines the deal and will determine how the sale of the company will occur as well as cover debt terms and forms of payment. The deal structure can become a (more…)
Read MoreSignificance of Preliminary Due Diligence when Buying or Selling a Business
When pursuing a potential business acquisition, a buyer should have specific criteria in mind in defining the ideal target company. Once a buyer has located the potential prospect, a low cost, high level due diligence should be performed. This initial act of uncovering information can be referred to as the preliminary due diligence process. In this stage the prospect will provide information with minimal supporting evidence as this is more of a cursory review to help evaluate whether to take the next step in the formal, more detailed due diligence process down the road.
Preliminary due diligence should occur after the buyer has determined that the targeted business meets certain characteristics. This can be accomplished during the initial search process by reviewing information from the business listing as well as from the Confidential Business Review (CBR).
The initial search process occurs prior to preliminary due diligence and should provide a high-level view of significant characteristics such as: (more…)
Read MoreKeystone Business Advisors Facilitates Alinea Medical Imaging Acquisitions
FOR IMMEDIATE RELEASE
(Los Angeles, CA) – Keystone Business Advisors recently announced that Alinea Medical Imaging, California-based medical imaging, and mobile mammography services company, retained Dave Richards, a Business Broker, of Keystone Business Advisors to represent them in simultaneous acquisition of Inner Images Services, Inc. and Mobile Mammography Screening, Inc. making the company the clear market leader for mobile digital mammography services in California. Inner Images Services, Inc. provides on-site digital mobile mammography services to over 80 community-based health centers throughout the state. The company is a preferred provider in most health networks including government-funded programs such as Every Women Counts. The acquisition of the collective companies increases Alinea’s mobile breast cancer screening fleet to
Read MoreTop Reasons Business Sales Transactions Fall Through
Often with a small to midsize company the owner has put a great deal of time and energy into the success of the business. The owners may see the company as an extension of themselves that they worked hard to build and as a result may be looking at it from an emotional or egotistical perspective. Some owners may know the ins and outs of the business like the back of their hand but may not take the time to evaluate how the business may look to a potential buyer. This lack of awareness and preparation can lead to potential reasons for termination of the sale including poor accounting and bookkeeping, inaccurate sales or performance data, unrealistic valuation, or longer than expected transition times to name a few.
According to a sample polling of IBBA business advisors the top reason that half of the deals fell through in Q1/2018 was unrealistic seller expectations at 12% (tied with buyer cold feet). When valuing the business prior to sale it is not surprising that many owners will have a higher than expected price in mind. This is reasonable knowing how much effort has been put into to getting the company where it is today. Owners will also have strong emotional ties with the business that simply are not quantifiable. This perspective can further be explained by what is called the endowment effect. Simply put the endowment effect is the tendency for people who own a good, or business in this case, to value it more than people who do not. The endowment effect causes many sellers to have an inflated idea of the sales price due to their unique perspective. Buyers on the other hand are looking more at the bottom line and are concerned with cash flow and potential risks. A buyer is usually concerned with specific questions such as: (more…)
Read MoreDetermining Owner Commitment to Selling a Business
As an owner, deciding to sell your business can be a difficult and time-consuming experience, and one that requires proper planning and awareness of marketability. When evaluating a potential business for purchase, it is important to understand the owner’s commitment to the sale. Many owners have prepared from the early stages of the life of the business and have developed a detailed exit plan by the time they are ready to retire. In other cases, the owners may find themselves selling before they are entirely prepared, either because of burnout or divorce for example.
According to the International Business Brokers Association (IBBA) when it comes to the buying or selling of a business, 49% of the transactions did not make it to closing in Q1/2018. When evaluating the owner’s commitment and potential to close it often comes down to the owner’s motivation to sell as well as the amount of planning the owner has put into developing a successful exit strategy. Determining an owner’s motivation to sell is an important step in the initial due diligence process as it will sometimes shed some light on the likelihood that the deal will go through.
Below are common reasons owners decide to sell a business:
Retirement: The International Business Brokers Association (IBBA) lists retirement as the number one reason business owners decide to sell their business for listings in the <$500K-$5Mil range. Adding to this already common reason, there is a major uptick in the amount of small businesses being put on the market with the massive influx of baby boomer business owners reaching retirement age. According to the California Association of Business Brokers, retiring Boomer business owners will sell or donate $10 trillion worth of assets over the next (more…)
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