Letter of Intent: Starting Point of Negotiations for a Business Sale
Posted by Kipp Krukowski on Thu, Dec 24, 2009 @ 04:07 AM
A letter of intent is an important milestone in the process of selling a business. When a business buyer puts a letter of intent, or offer, on the business, it shows that the buyer is seriously interested in your business. In regards to when the letter of intent comes in the process, I am personally a big fan of it coming earlier rather than later in the process. A buyer should be able to determine after seeing the business and talking to the business owner and receiving some basic financial information if he should make an offer and for how much.
I often see business buyers wanting to spend a lot of time gathering and reviewing detailed information on a business prior to making an offer. My question and concern with a buyer that wants to do a lot of due diligence prior to a letter of intent is: Why spend a lot of time as well as money on accountants and attorneys doing detailed due diligence if you don't even know if you and the seller are in the same ballpark in regards to price and terms of a deal?
A letter of intent shows a seller that the business buyer is serious and often opens up the line of communication for a buyer to learn more than what is visibly present on financial statements. A seller realizes that the buyer isn't just a tire kicker or someone out there fishing for information so he often opens up.
A properly written letter of intent will outline the details of the deal in regards to price and terms as well as provide contingencies that have to be met prior to closing. It will create a road map of what information will need to be provided and reviewed during the more in depth due diligence period. Details may include how much the business seller receives at closing, how much is being asked to be seller financed, the length and interest rates of payments, earn-out details, training details, timelines, non-compete restrictions, and many other items that are important to be negotiated. Other details could include price allocations as well as how the inventory and accounts receivable and payables will be handled. Price is not the only thing that needs to be considered. Terms can make or break a deal.
I recommend to all business sellers that even if a buyer comes in with a ridiculous offer to still respond and make a counter offer. The business buyer may just be testing the waters to see how desperate you are to sell. Play the game. This is also where a business valuation may come in handy. To justify your counter offer, you may want to show the buyer a business valuation at this point to show how you derived at the price of your counter offer.