The Letter of Intent or LOI is the cornerstone pre-contractual document given to the seller by the buyer that summarizes the understanding of how a transaction will occur as of the date of the LOI. A Letter of Intent can also be called a Term Sheet, Memorandum of Understanding, or Agreement in Principle. No matter what it is called, the meaning is the same. The LOI will describe what exactly is being purchased and the terms of the transaction. The LOI is non-binding, meaning that is pre-contractual and is really just a way to move the transaction closer to a…
Author: Gregory Pearl
Business Sellers: Beware Due Diligence
Many business owners think that selling their company is simple – “clean” it up a little, find a good intermediary, and then wait for the offers. But it is not that simple. There is something called the “due diligence” phase. Buyers want to know what they are buying. They want full disclosure. No surprises. That’s what buyers use “due diligence” for. Eliminate the surprises. The due diligence phase can last from one to three months. Maybe longer, it depends. The best way to speed the process along is to have all the information that a buyer would want to see…
A Warning About Due Diligence
The due diligence phase of a transaction can haunt the seller of a business in many ways. I wrote about this earlier, but it never hurts repeating. The best way to avoid problems during due diligence is to reveal all of the company’s problems right away. As soon as possible. Of course, the seller should have good explanations as to why the issue is not a big deal or a problem. Why it can be managed. But especially don’t let the buyer find out on their own. Not all due diligence issues are financial (though that is very important). Some…
What are Representations and Warranties and Why Are They Important?
Representations and Warranties, commonly called Reps & Warranties, is a clause(s) in an acquisition purchase agreement made by both the buyer and seller to disclose material information. The seller’s reps and warranties are usually more extensive as they include information about the company being sold. The representation part is a statement as to a fact., the warranty is a promise of indemnity if that statement is false. So, in an M&A situation, the seller is essentially guaranteeing certain things in a transaction. Generally, buyers want to have as many Reps & Warranties as possible. But sellers want to be careful…
More On Selling Your Business
Selling a privately held business is not like selling real estate, it is far more complicated. And it isn’t just the sales process that is more complicated. Other business issues can arise that slow things down. Delay may be the worst enemy of closing a transaction. Most business owners only sell one company in their entire life. Professional corporate M&A (business development) specialists have bought and sold many of them. Some will have worked, some will not have worked. But with each, the participants’ experience grows. What are the implications for the seller? The buyer will probably be more experienced…
What are Off-Balance Sheet Items?
Off-balance sheet items are those assets or liabilities that are not reported in the company’s financial statements. They are not on the balance sheet. Off-balance sheet items are often not obvious. If a seller does not disclose these items at the beginning of the business sale process, the buyer’s confidence in the seller will be shaken when they are disclosed during due diligence. During a business valuation for tax (and other) purposes, one of my standard questions to the business owner is if there are any Off-Balance sheet items. The seller needs to be transparent with a buyer early in…
The Closing: Monday to Thursday is OK. Skip Fridays
A closing is where all the legal documents are signed and money changes hands in a business sale (transaction). It is often a good idea to have a pre-closing meeting a week or so before to make sure there are no major issues that will prevent the actual closing from happening. So that everything will go smoothly. Both the buyer and the seller should be represented by the principals, people who authority to make decisions on the spot. That means any changes will not be held up because of a lack of authority. Have your support staff there to make…