You have finally reached the stage where the actual selling of your business begins. One of my attorney friends actually calls this stage “the first of many battles” in the “war we’re going to wage.” Your potential buyers become intentional buyers. Once they see the value of your business, buyers will issue a Letter of Intent to purchase your company. Negotiations begin. If buyer and seller teams reach agreements beneficial to both parties, you win the first battle in the formal business sale. As I’ve done before, let me implore you to listen to your legal counsel. Rely on your transition team to guide you through the landmines. This is an exciting time! However, don’t let the thrill of a Letter of Intent to buy your business cost you. Take this first step in the formal business sale cautiously.
00:44 – The Letter of Intent, the first step in a formal Business sale
02:45 – What is a Letter of Intent?
04:49 – What is included in the LOI?
08:46 – A LOI is not really a binding agreement
09:01 – Why have an LOI?
10:42 – Conditions to look out for
15:08 – State what is not for sale
17:26 – Other Ts&Cs to be aware of
20:27 – Conclusion
I can remember it well… way back in elementary school, like any kid, my friends and I had childhood crushes. We chased girls on the playground. Inevitably, some of my friends even handed the girls a “Do you like me?” letter. You know the one I’m talking about – the one that asks you to check “Yes” or “No.”
I’ve only experienced that same type of feeling during one other circumstance in my life – the day I received my first Letter of Intent to buy my first business. Years after those silly elementary school days and after I met the woman of my dreams, I decided to relocate to Tennessee. I knew that I couldn’t take my landscaping company with me. Since I had a business partner, I went to him and proposed that he buy out my half of the company. After talking with his wife, he came back and gave me a Letter of Intent to buy my part of the business. I’ll never forget it. It was awesome, just like that feeling I had back in grade school when I asked a girl to go out with me!
“Just like a first date sets the stage for a relationship, the Letter of Intent sets the stage for your business sale.” – Justin Goodbread, CFP®Click to tweet
Sometimes called a Memorandum of Understanding or an LOI, the Letter of Intent alerts a business seller that a buyer “intends” to purchase his company. Usually, the LOI is non-binding, but many courts across our nation and around the world uphold its provisions as contractual and binding. Therefore, whenever you receive a Letter of Intent, contact your attorney and your transition team. Let them review the document and guide your next steps.
So what purpose does this potentially binding document serve? In its most basic form, the LOI is an agreement to agree or to reach an agreement. Just like a first date sets the stage for a relationship, the Letter of Intent sets the stage for your business sale. It can effectively do one or more of the following things:
Whether the Letter of Intent shows a basic commitment between the buyer and seller or publicizes the trading of a company’s stock, it will inevitably contain a number of elements. While not exhaustive, I’ve compiled a list of details attorneys I work with and I have seen throughout our careers.
Since the Letter of Intent signals the start of the formal business sales process, you must be more cautious than ever before. Buyers will make many demands, and you have the choice to accept them or refuse them. Adding restrictions or limits to buyer demands can protect your business during this due-diligence period. I can’t say this enough; lean on your team. The professionals you’ve assembled have walked down this road before and will know how to advise you.
Nonetheless, I want to share with you the guidelines I tend to follow when I receive a Letter of Intent on behalf of my clients or when I’ve sold my own businesses:
A sharp buyer is going to try to get everything he can. So when you’re dealing with the Letter of Intent to buy your business, listen to your legal and professional counsel. While this process is probably new to you, they have dealt with this before. Be excited, but be wise. Seek and follow advice.
Friends, the Letter of Intent is a major event. You’re going to feel butterflies of excitement and fear in your chest. It’s almost like hitting the business lottery. Now is when your business deal is going to make it or break it. If you can make it through to the end, though, the pay-out is totally worth it… the subject of our next article.