What deal points really matter as you negotiate the LOI to close?
April 23, 2021
by a searcher from University of Pennsylvania - The Wharton School in Eugene, OR, USA
Does anyone have a resource that can educate searchers on the deal points that really matter as you negotiate the LOI into close? I realize that a big part of that is the taxation on the transaction. When one side benefits, it usually costs the other. So what matters by priority and how are different elements in the transaction taxed?
Many thanks in advance to the experts out there.
from Wayne State University in Linden, MI 48451, USA
A big part of the deal actually closing is emotional buy in from both sides or what I refer to as “emotional equity”. This is built during the entire transaction process, and there is often very little at the LOI stage. It is this emotional equity that will keep you grinding away at the details and working through the inevitable land mines that come up in every deal. You need to figure out what you are trying to accomplish prior to making an offer. Why are you a Searcher and what is important to you, i.e., a large salary, building equity for the future, a better quality of work life, the desire to “build” something, etc. you likely will not get everything, so know what you willing to sacrifice. Whatever it is you are trying to accomplish you need to be honest with yourself. This will help you narrow down your search to a business you really want.
You also must figure out what the seller’s true motivation is. Believe it or not, it is not always about a large pile of cash at close when dealing with quality small to mid-size businesses. The owner has probably made a very good living and the sale is just the cherry on top of the Sunday. (Note, this is for QUALITY businesses, not marginal or poorly run-they typically need to sell and need as much cash upfront as possible). I have had sell side clients turn down full price cash offers because they simply did not like the buyer, and then sell for a lower amount to a buyer that they did like. I have even had one seller finance 100% and pay my fee out of their own pocket. This seller did not need the money, saw himself in the young buyer and wanted to give him a chance.
So, in a nutshell, figure out what you want then go find a business that will fulfill that need. When you think you have found that business, build a relationship with the seller, bring in professionals when needed, do not get to hung up on the initial IOI or LOI. Rarely does a deal close exactly as outlined in the LOI.
from Illinois Institute of Technology in Pasadena, CA, USA
• consideration and structure of consideration
• any roll-over equity by sellers
• identification of the acquiring entity
• exclusivity (perhaps a go shop clause)
• working capital adjustment targets
• continuity of present operations
• no major adjustments in CAPEX, salaries, bonuses, etc. without discussion with the investor/acquirer
• due diligence list of materials to be examined/ Q of E and timeline for DD
• who will provide documentation of purchase agreements and other legal docs. LOI is non-binding
• structure of deal: assets/stock and if 338 will be employed
• reconciliation of inventory, inspection and valuation if a major portion of the business assets
• appraisal of fixed assets
• real estate: leases, FMV terms/conditions
• employment agreements: major terms if owners continue in the business
• covenant not to compete
• notification provisions if contracts are a key asset of the seller
• termination / timeline...LOI offer expiration....anticipated closing date
• governing law
• confidentiality
• indemnification provisions: basket/cap
• expenses: who is responsible