How to interpret an offer (in the form of an Indication of Interest or Letter of Intent)
Before you receive a preliminary offer letter from a potential buyer, you have hopefully covered quite a bit of ground with the buyer already. You would have signed a Nondisclosure/Confidentiality Agreement in which the buyer agrees not to use the information you will be sharing about your company for any reason other than to evaluate your company for potential purchase. This should include an agreement not to solicit your clients and your employees. It will also state that neither of the parties will share the information or the fact that discussions are taking place with anyone other than a strict list of “need to know” employees and advisors.
After you’ve signed this, you would have shared basic information about your company. At the same time, I hope you requested and received information from the buyer about their financial situation and their vision for how to improve your business by having it become part of their business (or, if this is an individual, what their experience is in the industry, their creditworthiness, etc.). You would likely have already shared some key facts about your company in summarized form. This includes the number and type of clients, longevity of client relationships, number and types of employees and pay ranges, at least the past three years of your Income Statement and Balance Sheets the types of services offered, and the breakdown for each line of business in terms of revenue and gross profit calculations. Usually, several rounds of questions and answers follow this step.
If you and the buyer are still interested in continuing your discussions, you would probably arrange to have a Zoom call with Buyer, Seller, and their advisors. That is a good time to get a feel from an interpersonal or relationship perspective about each other. While all this may seem casual and friendly, everyone knows that it is important to establish a level of trust so that the collaborative and adversarial parts of deal-making can move forward successfully. If the balance between those perspectives is not comfortable for the parties, it can be very hard to move forward. Best to find that out at this stage and not do all the work and have the deal “blow up” at the last minute. (This does remind me of first dates. You can look great to each other on paper, but not like each other in person at all.)
In larger transactions in the landscaping industry, we usually see the buyer and seller wanting to get some sort of a written meeting of the minds prior to going through due diligence and drafting the final purchase agreement. Put in the terms of a non-binding offer letter (Letter of Intent), this document will set the basic terms and outline what needs to happen to complete the transaction. We also find that landscaping industry buyers will require a period of exclusivity while they are completing the due diligence. Although that may create fear in a seller that the buyer is chasing away other buyers, thus leaving them to adjust their offer with less competition, we haven’t seen that in our industry. In most cases, if you receive an Indication of Interest Letter or a Letter of Intent and Term Sheet, you’re engaged. It is rare for the due diligence process to reveal issues that are so problematic that a buyer would try to back out of their offer. It is also rare that a seller has “hidden” issues that can’t be resolved or negotiated to complete the deal.
Keep in mind that serial acquirers in an industry realize that their reputation as a buyer and great company for sellers to join hinges on their trustworthiness, relationships, and ongoing reputation. Even newer buyers will value their reputation, since sellers will often check references with other companies that the buyer has added to their group. I’ve observed very high-quality standards among the buyers and sellers in the landscaping industry.
This is not to say that every offer letter will result in a completed sale. I am sure there are sellers who had hidden problems in their due diligence that destroyed value so much that a deal couldn’t come together. There are probably also buyers who are rigid about certain terms that they see as so essential that they can’t close without various factors in place (leases, key persons, etc.) That’s not often the case, though, especially when a seller has an advisor who has performed a “pre-view” of the due diligence and the buyer has made their essential terms clear upfront.
In terms of negotiating strategy, there is a lot of written material saying that once the LOI is signed by the seller, all the “advantages” go to the Buyer. “The price can only go down”. That may be true for smaller deals, but the level of commitment on the part of both parties to complete the due diligence is significant in terms of time and the number of resources. The potential for chaos with no LOI can cause an open-ended continuing interpretation of the terms can easily kill a deal. I’ve seen some transactions (not in our industry) take six months to come to agreement on the price and terms of the Letter of Intent and Term Sheet. I doubt that deal would have been completed if the parties had to negotiate using the Purchase Agreement itself.
If you’ve received a solid offer from a qualified buyer with a LOI that you find acceptable (be sure to have your attorney review!) and you’ve signed it, consider yourself engaged. Congratulations! Now focus on getting that due diligence completed and those purchase agreements set in time for the “wedding”!
Have you been thinking of selling to an external buyer, now might be your best timing for a while. If you’re want to explore your exit options, buy another company or you bought one and now want to integrate it, call me.
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