Steps to Selling Your Business – The Letter of Intent

  1. Decide if you want to sell and when. What are your goals?
  2. Engage your advisor(s).
  3. Identify the potential transaction. Inside sale/external/family/etc.
  4. Review the process for selling with your advisor. Set the action plan. Who/What/When/How/Milestones etc.
  5. Discuss the importance of confidentiality. Set up NDA/Confidentiality Agreement.
  6. Share initial information for preliminary valuation range
  7. Review initial results for financial and operational
  8. Establish a valuation range
  9. Produce/share additional information for analysis and preparation of marketing of the business and re-due diligence review
  10. Research market for the company (local, national, etc.) and prepare Buyer List
  11. Prepare the Offering Memorandum (the “Book) and Teaser
  12. Market and sell the business.
  13. Negotiate price and terms with potential buyers and seller
  14. Determine the structure of the transaction with tax, accounting and legal advisors.
  15. Receive, negotiate and execute LOI

Congratulations! You’ve stuck with the process and expect to receive at least one offer from a qualified buyer for your company. The form of this initial offer will usually be a Non-Binding Letter of Intent, or it could be in the form of a Non-Binding Indication of Interest or a Term Sheet with either of those.  What will be included in that offer?

A Letter of Intent and/or Term Sheet is usually the first offer in writing a Seller will receive from a potential Buyer. It will establish the major points of the deal, the framework and the process the parties will follow to get to the final agreements and closing.  It will be to the point, usually two or three pages and some parts of it will be binding and some will not be.

The key elements you are likely to see in an LOI will include:

  • The names of the legal entity being sold and its shareholders
  • The name of the buyer’s legal entity
  • The offer
    • Form of transaction.
      • Usually asset purchase in small to mid-market deals
      • Buyer will buy assets and assume no liabilities
      • Seller keeps cash and accounts receivable
      • Working capital requirement
    • Total purchase price consisting of
      • Cash at closing
      • Cash or loan payments in subsequent periods
      • An escrow account
    • Other Significant Terms
      • Price based on certain assumptions
      • Employment, noncompete, employee, client targets
    • Financing contingency, if any, for the buyer
  • Other
    • Confidentiality
    • Access and Due Diligence Period
    • Estimated Closing Date and Closing Provisions
    • Obligations if the deal doesn’t close
    • Exclusivity and No Shop Provision
    • Allocation of fees and expenses
    • Conduct of business
    • Disclosure and press releases

In next week’s blog, I will outline some of the terms to pay careful attention at this point in the negotiation to avoid a deal-breaking up or reduction in price.

Of course, every buyer has their own set of circumstances and how the seller’s company fits with the buyer’s is based on the value drivers of both businesses.  The better the seller understands his/her own business’ strengths and weaknesses, the better the price.

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

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