LOI w/out meeting the seller
November 03, 2024
by a searcher from Columbia University - Columbia Business School in San Ramon, CA, USA
I'm attempting to acquire a small business. The broker provided a short CIM that gives some information but not much. The broker is requesting an LOI before allowing meetings with the seller. I'm wondering: 1) How typical is this? 2) Meeting the seller seems critical to understanding the business, the seller's motives, and, most importantly, giving a credible valuation range for the offer. How have others bridged this gap?
from Parsons School of Design in Cuxhaven, Germany
Here's how to approach this dilemma:
1. Typical nature of the request:
It's relatively common for brokers to request an LOI before allowing meetings with the seller. This practice aims to filter out non-serious buyers and protect the seller's time and confidentiality.
2. Bridging the gap:
👉 Request additional information Before submitting an LOI, ask the broker for more detailed information about the business. This may include:
- Historical financial statements
- Sales pipeline and forecasts
- Customer data (number of customers, renewal rates)
- Employee information - High-level product details
👉 Propose a non-binding Indication of Interest (IOI) Instead of jumping straight to an LOI, suggest submitting an IOI first.
An IOI is less formal and typically includes:
- A valuation range rather than a specific price
- General terms of the potential transaction - An outline of the due diligence process
👉 Negotiate a limited meeting
If the broker insists on an LOI, try to negotiate a brief initial meeting or call with the seller before submitting a formal LOI. This can help you gather crucial information about the seller's motivations and the business's potential.
👉 Draft a conditional LOI
If you must submit an LOI without meeting the seller, make it clear that your offer is subject to further due diligence and a face-to-face meeting. Include provisions that allow you to adjust the terms based on new information discovered during due diligence.
👉 Focus on the process
In your LOI, emphasize the steps you plan to take post-signing, such as due diligence timelines and final agreement drafting. This demonstrates your seriousness while keeping your options open.
Remember, while an LOI is typically non-binding overall, it may contain binding clauses such as confidentiality and exclusivity agreements. Be cautious about committing to terms without sufficient information, and consider seeking legal advice to protect your interests throughout the acquisition process.
from Bentley College in Miami, FL, USA
Here are a few ways I've seen others handle this:
LOI with Minimal Commitments: Consider submitting an LOI with broad terms and a lower level of commitment, making it clear that the offer is contingent on a direct meeting with the seller and further due diligence. This shows you're serious but need more info to finalize your valuation.
Request an Intro Call: Sometimes, brokers will agree to a short introductory call between you and the seller prior to a formal LOI. If they resist, explain that understanding the seller's perspective is essential for crafting a realistic offer.
Clarify Key Questions with the Broker: If the broker holds firm on no meeting before an LOI, try to gather more details from them directly. Key points like the seller's reason for selling, business growth opportunities, and customer concentration risks can all be indicators of value and will help refine your offer.
Note: This response was generated using a combination of custom AI and my own internal data, research and experience in the industry to ensure it’s both comprehensive and accurate.