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Two business acquisitions that should have occurred this past year went sideways largely due to the Seller trying to change the Letter of Intent (LOI) into a Purchase and Sale Agreement. Both Buyers ultimately walked.
The Purchase and Sale Agreement is the actual document that exchanges fixed assets, real estate (if applicable) and more from Seller to Buyer. It is the Purchase and Sale Agreement where all issues of the sale are brought up and established: allocation of money, how many dollars to non-compete, how many dollars to fixed assets, etc. It is the document that establishes all major and minor points of the sale.
A Letter of Intent is a strong document, and generally states the amount of money Buyer is willing to pay Seller for the business, and requests the Seller to take the business off the market for a period of time (usually 45 days) so Buyer can perform due diligence on the business.
In these two instances, the Seller countered the LOI, as though it was the actual purchase agreement. They did not counter the price, they began adding in Purchase and Sale Agreement terms, such as money allocated to non-compete, or how much rent the Buyer should pay the Seller.
While these issues are important, it had the effect of blowing the Buyer away. Imagine fishing and your bait is in the water. The LOI is the fish nibbling at the bait. If you yank too quickly, the fish swims away.
Seller may ask why they should take the business off the market for 45 days. Let's presume that the Buyer is certainly qualified to buy the business (true in both cases sited above). They are the real deal and a good fit to buy the business. They have been qualified to buy the business. They have signed their non-compete. Your accounting has been set up so certain accounts (if necessary) are blanked out; Buyer can only see gross dollars for a certain customer, not the customer's name. The rules are established who Buyer can talk to during the 45 days, and who they cannot. These are the rules that are important at this stage, not the amount of dollars to be allocated to rent.
For starters, it's not that bad to take the business off the market for some 45 days. Seller is presumably making money. Buyer has been qualified and has the money to buy the business. This is the real deal. Seller can simply attend to business, making sure clients are happy as well as suppliers. Buyer does his due diligence, to satisfy himself that the Executive Summary information he has gotten on the business is in fact accurate.
Keep in mind it is the Buyer who is actually spending the money during this 45 days; probably hiring CPA's and other professionals to investigate the business. It is the Buyer who is not attending to business.
In short, there is a rhythm to a successful business sale. It includes non-disclosures and introduction between Buyer and Seller. Buyer makes the offer (LOI). Seller accepts the offer. Buyer performs his due diligence. Seller continues making money and keeping customers and suppliers happy. Buyer is satisfied with the due diligence and wants to buy the business. Seller and Buyer - with the help of the Business Broker and often CPA's and attorneys, generate a Purchase and Sale Agreement. This tackles the actual sale of the business. All points that are of concern to both parties are discussed and agreed upon. Purchase and Sale Agreement is signed off, and a closing date established.
And the Buyer, at this point, can start thinking about that long awaited vacation...
Gary McAuley
Exit Strategies * Acquisitions
Evaluations
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