7 Steps before Signing a Letter of Intent

Phil Spensieri, TAB York

If you have a party interested in buying your business, here are seven things you can do to reduce the chance of your deal dragging on for months and becoming watered down, even before you sign the Letter of Intent.

1. Make sure your customer contracts have “successor” clauses. Have customers sign long-term, standardised contracts, including a clause stating that the obligations of the contract survive any change in company ownership.
2. Nurture and prepare a group of 10 to 15 “reference-able” customers. Acquirers will want to ask your customers why they do business with you and not your competitors. Before you sign a Letter of Intent, cultivate a group of customers to act as references.
3. Ensure your management team is all on the same page. During due diligence, acquirers will want to interview your managers without you in the room. They want to find out if everyone in your company is pulling in the same direction.
4. Consider getting audited financials. An acquirer will have more confidence in your numbers and will perceive less risk if your books are professionally audited.
5. Disclose the risks up front. Every company has some risk factors. Disclose any legal or accounting hiccups before you sign the Letter of Intent.
6. Negotiate down the due diligence period. Most acquirers will ask for a period of 60 or 90 days to complete their due diligence. You may be able to negotiate this down to 45 days—perhaps even 30 with some financial buyers.
7. Make it clear there are others at the table. Explain that, while you think the acquirer’s offer is the strongest and you intend to honor the “no shop” agreement, there are other interested parties at the table.

Of course, every Letter of Intent is different and every sell is unique, but if you can follow these seven steps, you can better protect the value of your business when there is a shift in the balance of power during negotiations.


Selling to an Employee

While this may seem obvious, if you are considering selling your business to one of your employees it is imperative that you share everything with the employee before they decide if they want to take over your business. Sometimes when selling the business to an employee we are more casual than we would be with an outside buyer. The employee needs to understand the financials and the various management challenges, and they need to be immersed in the business for as long as possible before you move on. In fact, if you could let the employee run the business for an appropriate amount of time with you in the background that would be tremendous as the employee gets to taste/feel the pressures of ownership and you have the opportunity to make sure that they, in fact, can keep your business running. Stay out of his/her way to the extent possible and let other employees know that your successor is running the business. Also, make sure you put a succession plan in place that highlights not only the legal and financial aspects, but also the various milestones related to the terms of managing/transitioning the company ownership.