LOI submitted. What's next?

searcher profile

September 25, 2020

by a searcher from Columbia University - Columbia Business School in Princeton, NJ, USA

Hi All, recently submitted an LOI for a Commercial HVAC Company. Any self funded searchers that have recently closed a deal in the last year can provide some guidance on what's next after an LOI is submitted? Should it be negotiated as stock or asset sale? Who do you use for due diligence on the target while keeping search cost low? Thanks!

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commentor profile
Reply by a professional
from University of Minnesota in Minneapolis, MN, USA
A few things to keep in mind, in particular with regard to commercial HVAC or similar contract-heavy companies: if you do a stock sale, the customer contracts almost certainly stay in place, and you don't have to worry about the extra step of assigning the contracts to the buying entity. Depending on how the target's contracts look, this may or may not be a big deal.

Also, if this is a union shop, be very sure you understand the implications of those underlying union agreements, including any obligations (especially personal obligations) to any pension funds. Consider hiring a lawyer with experience in the labor law space (disclaimer - I am not that lawyer).

Finally, keep in mind that there is a hybrid model available that allows you to blend the administrative convenience of the stock sale with the tax advantages (for a buyer) of an asset sale via a 338(h)(10) election. Google this for a plethora of information on this option. Keep in mind the potential liability of the stock sale remains significantly higher than the asset sale, even in the context of the 338(h)(10).

Good luck!
commentor profile
Reply by a searcher
from The University of Michigan in 1075 Gills Dr, Orlando, FL 32824, USA
Typically the buyer wants an asset sale because it limits their liability and they can depreciate the goodwill. The seller usually wants an asset sale because it results in a lower tax liability. This difference can be a deal breaker and often times the seller does not understand the tax implications to an asset sale until very late in the process and it kills a deal. I would have that conversation soon and advise the seller to discuss it with their accountant.

Regarding other steps, you should immediately hire a firm to do the QoE diligence, begin speaking to banks for the loan (this process will take longer than anything else), and find a lawyer to help with diligence and complete the transaction. You should also be compiling a list of items you want to dig into, for example reviewing customer contracts and building a model of when they expire.

I highly recommend speaking to ^redacted‌ from Live Oak Bank about your loan. Her and the rest of the Live Oak folks have been great to work with.
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