In my previous post, I covered the Letter of Intent and where it fits in the selling process. Before we get into some of the additional details, I wanted to share with you some thinking about the pluses and minuses of entering into an LOI or similar written non-binding agreement.

I’ve heard many attorneys say that the LOI is generally nothing more than a mostly non-binding document that prevents the seller from shopping the deal while the buyer works on due diligence. While that may be true, I find that for a smaller deal, it is also the way that the buyer will show intent to move forward with the transaction.

The buyer will be spending a lot of time and money on due diligence and providing a letter shows the buyer’s commitment to move forward with the deal and the basic outline of the deal to be contemplated. It is the opportunity for the parties to “flesh out” the deal points and creates a meeting of the minds for the transaction. There will be many additional details to review and negotiate as the parties work through the rest of the legal documents, including but not limited to the purchase agreement, employment and noncompete documents, leases, etc. but the LOI is usually when the serious buyer and the serious seller agree. Deals do fall apart after this point for a variety of reasons (more on that in another post) but if the parties have done their preparation ahead of time, the likelihood of that happening is reduced.

It is also true that in general, the price and terms will not significantly improve once the parties sign even a non-binding LOI. Sometimes, as in the case of an auction, an advisor may use this phase to collect competing serious offers and allow the parties to “bid” more than once to get to the best terms and price for their seller. In such cases, I usually see the letter called an Indication of Interest letter which is an even more basic outline of price/terms/major points. Frankly, I haven’t seen auctions used in the landscaping industry in my experience. My experience with the form has been with larger sellers spinning off a division or business unit. Unless your advisor is using the LOI to negotiate among more than one buyer (in which case, the buyers will usually be asked to sweeten their offer in terms of price and/or terms so the seller gets the best offer), I don’t think you will see better deal terms after the LOI is signed.

I’ve worked on a few transactions where the seller and his attorney refused to commit to even a non-binding LOI. In at least one of those cases, the deal fell apart because the seller thought he could negotiate continuously on every point up to and until the closing. This was for a relatively small deal, less than $7 million in enterprise value, and the buyer was not willing to haggle every step of the way. Especially in the landscaping industry, I have not seen Sellers take this kind of attitude and I think this is wise. The parties want to strike a mutually acceptable deal and move forward promptly. Time does kill deals and delays due to overwrought negotiations can be lethal.

Of course, every buyer and seller deal is unique within the basic process and the clearer communication that is facilitated by putting details in writing, the better in my opinion. The better the seller and the buyer understand his/her own business’ strengths and weaknesses, the better the price and terms.

If you’d like to talk about selling your company or buying one, please email me at [email protected] or call me at 224-688-8838. We’re here to help you harvest your potential!

Alison Hoffman

has more than 25 years of experience in strategy, operations, mergers and acquisitions and delivering business-to-business client solutions. Her areas of expertise include managing operations for profitable growth, organizational design and strategy activation. She brings a wealth of experience through her work in evaluating, valuing and purchasing over 30 companies, leading company-wide cultural and business integration projects and consolidating best practices among business processes and corresponding computing systems. Read Full Bio