| The letter of intent is an essential step in | | | | and expense of due diligence, the seller and his |
| facilitating the sale of a business. The purpose is | | | | business broker or merger and acquisition advisor |
| to establish the economic framework for buyer | | | | are not allowed to actively market the business |
| and business seller to move to the due diligence | | | | to other interested parties. |
| phase. It basically says that with all the available | | | | If you are the seller and you get your LOI, don't |
| information I have thus far seen and if that all | | | | celebrate yet. Make sure the financials that the |
| stands the scrutiny of due diligence, I am willing to | | | | buyer is analyzing to come up with his offer are |
| buy your business for X dollars under Y payment | | | | professionally done using GAAP. Normally a |
| terms. It is however, non- binding pending the | | | | measuring point is established in the LOI with |
| execution of mutually acceptable purchase | | | | those financials for net working capital. There will |
| agreements. | | | | be an adjustment made to the transaction value |
| If I am a seller, I am going to insist that I have | | | | (post closing adjustments) depending on the new |
| this letter establishing the economics of the deal | | | | net working capital balance post close. |
| before I agree to allow my company to be | | | | If the buyer is looking at sales forecasts prior to |
| turned inside out with buyer staff and advisors. If, | | | | submitting his LOI, make sure they are |
| as the seller, I want $5 million and the LOI | | | | conservative and accurate. If you have some |
| specifies $4.5 million, I am going to attempt to | | | | major sales losses or the pipeline moves to the |
| negotiate up before I counter sign this letter. If I | | | | right (they always do) some buyers may attempt |
| am still short on price and terms, I continue to sell | | | | to call that a material adverse change and look |
| the company to other interested buyers. | | | | for an adjustment in purchase price. |
| If I am the buyer, I want the seller to commit to | | | | Finally, the LOI is normally a three to seven page |
| my economic parameters before I spend | | | | document without a lot of legal boilerplate. The |
| thousands going through due diligence. The other | | | | purchase agreements that follow will take care of |
| important element of the LOI from the buyer's | | | | that. So expect 30 pages or more. Focus your |
| perspective is exclusivity. The buyer will lock up | | | | efforts on the economic parameters and |
| this company for a period of from 30 days to 90 | | | | conserve your legal budget. You will need your |
| days to complete their due diligence and execute | | | | attorney most for his help with the purchase |
| mutually agreeable definitive purchase agreements. | | | | agreements. |
| That means that in return for the time, effort | | | | |