LOI Questions
April 30, 2022
by a searcher from George Mason University - School of Business in Charlotte, NC, USA
I have had 2 conversations with the owner of this business. Essentially there are two owners (husband and wife) wife manages most operational tasks of the businesses, husband oversees financials.
We have met twice, once with just the wife, second time with both. We have covered everything that I need to know to feel comfortable operating the business outside of one thing. They have not given me access to their key employee who will potentially be part owner after the transition. The sellers feel his experience and relationships warrant that level of commitment to him from the new owner.
1. It would be acceptable to include a clause letter of intent would include a clause that if me and that key employee can't come to an agreement within reason on partnership, I would have the ability to back out of the deal, correct? They would like to have a LOI before granting me access to meet with the key employee.
2. I am also curious how common it is to use a lawyer to draft the LOI, and is a deposit customary? They did not mention anything about a deposit, but I know sometimes these agreements include one and sometimes they don't.
3. These sellers do not want to do any seller financing. This was not originally their business, it was passed down through a trust from the founder who unfortunately passed away unexpectedly. The current owners (Family members of original owner) are not local to where the business operates, and are not interested in being in the industry this business is in. They seem to want to take the money and swiftly remove themselves from the business. Typically, this would scare me and I would heavily weigh that as a negative in my overall risk perspective of the business, but in this circumstance I feel somewhat inclined to see their side of this. Thoughts?
from University of Illinois at Urbana in Chicago, IL, USA
2. Would absolutely recommend you have a lawyer review an LOI if you have not had legal review prior. If you don't, it implies you may not have a lawyer yet - and you will need a good business minded, deal experienced, attorney to help you get a deal done. If the lawyer does not know you, it would not be a shock to request a retainer. Perhaps you agree to some retainer, and the rest at close, etc. - but if this is your 1st deal - they will want to protect themselves too. In the serial PE / deal world, lawyers bill at close - this world is a little diff, particularly for inexperienced buyers. Simply put, a good lawyer is part of your team - you will need one to successfully do a deal. And they will help you on #1 above.
3. No one "wants" seller financing, but it may be necessary to bridge valuation. As to key employee, you must figure out how to determine if that employee is as key as they think. I've been involved in a deal where the employees were told a week before close, some were pissed / bitter, and the day after close 2 "key" employees walked - and had been in cahoots to set up a competing entity. We have experience, and good lawyers, and navigated it successfully - lost 0 customers or suppliers or other employees. But it sucked. The seller would not give us access until close to close, which is not atypical. You just have to be careful, see if you can get to know / trust the key person, and figure out how to align yourself with him or her for success.
from University of Texas at Austin in Austin, TX, USA