Selling a Business: The Letter of Intent

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Selling a Business: The Letter of Intent

Selling a business is a many step process. Geez, just getting the business ready to be sold takes plenty of work!

Some brokers think that, once all the preliminary work is done – the valuation, the listing, the preparation of the Offering Memorandum, the abstract, the marketing plan, etc., etc, – the actual selling process is easy. Well, it ain’t so, Bucko. The selling process is… well, a process in its own right.

From where to market the business to how to get the deal financed, there are many major aspects from start to finish of the selling process. But there are also plenty of small issues that you’ll hit along the way. One of them – and one that we get a lot of questions about – is the deal’s letter of intent or term sheet.

I spend time in our online course discussing when to use a letter of intent (“LOI”) and some of the issues it should address but we often receive questions about the LOI from both participants in the course as well as from existing brokers and general readers.

LOIs are seldom used in the purchase and sale of the smallest Main Street businesses. On the other hand, they are generally employed in larger deals and nearly always part of any lower Middle Market acquisition.

What is a Letter of Intent?

For those of you that don’t know, a letter of Intent is a document outlining one or more aspects of an agreement – or, rather, an anticipated agreement – between two or more parties before all the agreement’s terms and conditions are finalized. Some brokers use the phrase “term sheet” in place of the LOI or even a memorandum of understanding (“MoU”) but all are generally used as an initial document to govern an anticipated material transaction.

Many LOIs include confidentiality or non-disclosure agreements (NDAs), which contractually stipulate the components of any deal – or discussions of any deal – both parties agree to keep confidential. Many LOIs also feature no-solicitation provisions, which forbid the parties from poaching the other party’s employees.

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Our course, The Basic “How-To” of Becoming a Business Broker”, teaches how to market and sell businesses.

Become a Professional Business Broker…

LOIs resemble short, written contracts, but they are generally not contracts insofar as they are not, with the possible exception of any aspects relating to confidentiality and employee poaching, binding on the parties.They are mercifully free of all the legal jargon that a final, binding agreement will contain.

LOIs are useful when two parties want to hammer out the broad strokes of a deal before the finer points of a transaction are resolved. LOIs often include provisions stating that a deal may go through only if financing has been secured – or that a deal may be quashed if final papers are not signed by a certain date.

The general purpose of an LOI is to outline the salient points of a deal – purchase price and what can effect that price, due diligence requirements, time targets (dates by which certain events or tasks must occur or be completed), confidentiality issues, anticipated closing date and the like.

But there is one issue with an LOI or term sheet that a business broker must be extremely cautious about and that is what is commonly referred to as a “no-shop” clause.

What Is a No-Shop Clause?

A no-shop clause is a clause that bars the seller from soliciting a purchase proposal from any other party. In other words, the seller cannot shop the business around once a letter of intent or agreement in principle is entered into between the seller and the potential buyer. The letter of intent outlines one party’s commitment to do business and/or execute a deal with another, under certain conditions and provided certain stipulations are met.

Buyers usually – and rightfully – want to make sure that another buyer will not swoop in during the period between the signing of a non-binding LOI and the signing of a final, binding purchase and sale agreement – during which the parties are doing some preliminary due diligence and the professionals involved are drafting the necessary documents. The “no-shop” clause is the tool buyers use to keep that from happening.

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Our course, The Basic “How-To” of Becoming a Business Broker”, teaches how to become a professional business broker.

Become a Professional Business Broker…

But the issue we’re most concerned about is when we receive an LOI that contains an open-ended “no-shop” clause. In such an instance, the buyer can stall for as long as they want effectively keeping you from finding other buyers.

If you’ve been reading this blog for any length of time – or have taken our course on becoming a business broker – you know that, even if a business we list for sale goes under contract, we don’t stop marketing it until the deal is done – because any deal can fall apart for any number of reasons at any time up until the money changes hands.

The Bottom Line

An open-ended “no-shop” clause is a killer for you and your client, the business owner. It will impact momentum and bring your marketing efforts to a screeching halt. There has got to be an end point and the shorter the no-shop clause is in effect, the better. Make sure that any “no shop” clause in any LOI you receive has a “good only through” date.

If you have any questions, comments or feedback on this topic – or any topic related to business – I want to hear from you. Put them in the Comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.

I’ll be back with you again next Monday. In the meantime, I hope you have a profitable week!

Joe

#business #businessacquisition #sellabusiness #becomeabusinessbroker #businessbrokering #businessvaluation #MergersandAcquisitions

The author is the founder of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 600 in the world. He can be reached at joe@WorldwideBusinessBlog.com

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