You've finally found the right business to invest your (or someone else's) hard-earned cash in. Now the real work begins.
Before forking over any of that hard-earned cash and investing your time, you need to iron out the details of your letter of intent (LOI).
The purpose of the LOI is to get on the same page as the seller and get the deal-breakers out of the way right away. Keep in mind that the LOI is not an actual agreement, so there is nothing legally binding about it. It simply paves the way for the negotiation process and relationship building between you and the seller.
In order to set your business acquisition up for success, here are 6 tips for creating a better LOI.
1. Start with a Transaction Description
Start your LOI with the basics — a basic description of the business acquisition deal.
Anyone reading the intro, and nothing else, should have a general understanding of the document's purpose.
What to include in this section of the LOI:
- Who is buying WHAT from WHO?
- Is this an asset or equity deal?
- Will you be using an affiliate?
- What is the timeline of the deal?
- Are there any terms used throughout the LOI that need to be defined?
2. Then the Purchase Price
Money talk time.
It is important that all parties involved in the deal are on the same page about the financials. Simply stating the amount paid for the business, when the payment will be delivered, and how it will be paid, will suffice.
Remember that the "how you'll pay for it" needs to be figured out before putting together the LOI. Luckily there are many financing options to choose from: bank loan, cash payout, or self-funded search.
3. List All the Conditions for Closing
Not just some, ALL.
You'll want to thoroughly outline the closing conditions of the business acquisition and everything that needs to be done before the deal is wrapped up.
A few items to include as closing conditions:
- Third-party consents such as landlord consents or material agreements
- Financing conditions
- The execution of definitive agreements
- All required regulatory approvals
4. Don't Forget About Due Diligence
If you've made it this far, then you understand the importance of due diligence in a merger and acquisition deal. Due diligence helps identify any liabilities or red flags before any formal binding agreement is signed. In you're LOI, you'll want to include stipulations that require the seller's participation in your preliminary due diligence review.
5. Wrap it Up with Exclusivity and Restrictive Covenants
According to the experts at Unconventional Acquisitions, this is THE most important tip for creating a better LOI.
You want to make sure the seller isn't entertaining competing inquiries from other potential buyers while wrapping up the buy. You should clearly state who the seller can disclose deal information to — attorney, financers, stakeholders, etc. — and add a confidentiality clause to guarantee the information does not go to people outside of those approved — employees, prospective buyers, etc.
Finally, it is critical to build a non-compete and non-solicitation agreement into the LOI. The last thing you want is the seller competing against you once the sale of the business has gone through, and them stealing back customers and employees.
6. Add the Finishing Touches, So It's Ready to Go
The final piece of your LOI should include a non-binding effect, which just reinforces that this document is not a legally binding agreement.
Before sending the LOI to the seller, you'll want to have an attorney with SMB LOI experience look it over. This is the starting point of the acquisition process and lays the foundation for negotiations.
"If the warning bells are going off during the LOI stage, it’s a sign that you should respectfully bow out. "
— Codie & Ryan, Unconventional Acquisitions Founders
Looking for help crafting your LOI or securing financing for your business acquisition, we have a team of business experts ready to help.