Congratulations for building a salable business. Not everyone does that. A signed LOI is one of dozens of steps required to close a deal, all of which require careful negotiation and an experienced understanding of transactional mechanics and nuance. To stay in control, it is critical for business owners to set realistic expectations, understand procedure, and manage timeline awareness.
It is a challenging task to navigate the transactional process. It is worth the effort and expense to hire a seasoned and professional M&A team like SMP Capital Partners to help you manage the valuation, marketing, identify buyer targets, assess an LOI’s content, context, overall benefit, and finally close the transaction.
Once you have a signed LOI, the SMP Capital team builds a bespoke closing checklist which outlines the voluminous tasks that accompany a successful transaction. Along with a timeline for stages of completion to sort through tasks that are time sensitive or that require third party consent, we work collectively to transition systems, processes, and assignments prior to close. We do not take shortcuts, we are diligent and persistent, and our process is transparent from the very start.
What the LOI Establishes
Standard LOI’s establish a mutually agreed upon purchase price or price range based on several assumptions that will prove out during the due diligence process in order to consummate closing. The LOI will outline a proposed deal structure (asset sale vs. stock sale, cash vs. seller note vs. earnout), high level terms on transition expectations, non-compete/non-solicitation expectations, and working capital guarantees. In addition, LOI’s will establish a series of conditions to close that include lending and financing approval, real property appraisal and environmental assessment, promissory note execution, and receipt of all required third party consents and governmental approvals.
While most offers are non-binding on price and terms, they generally include confidentiality clauses and establish timelines and conditions for due diligence. In consideration of the time and expense the buyer will incur conducting due diligence and negotiating the definitive agreement, the seller will generally grant an exclusivity period (60-120 days) from the date of LOI execution where the seller agrees not to directly or indirectly engage with other potential suitors regarding a potential sale, transfer, or disposition of the business assets or property.
Due Diligence Process
Due diligence is a comprehensive and thorough process that investigates and verifies business reporting data before finalizing a transaction; and is managed through a detailed, secure, and thorough data room that is organized during pre-transactional prep with the SMP Capital team. It allows a buyer group to safely confirm risks, validate assumptions, and authenticate value.
A complete diligence process will include a quality of earnings review of historical financial performance which involves an analysis of tax records, internal financial statements, contracts & agreements, employee & management information, etc… Buyers will validate revenue trends and profit margins, customer mix, recurring revenues, competition, and the company’s market position along with an examination of the seller’s daily operational responsibilities. This exhaustive review will prove out buyer assumptions, generate confidence, and validate that they are making a well-informed decision.
Good transactions are built on trust, integrity, respect, and good faith commitment. They are not easy to close and transition at any dollar amount. Get your business in a transactional state of readiness and keep it there. It will take away buyer objectives, eliminate questions, reduce buyer and seller risk, streamline due diligence, protect confidentiality, and most importantly create trust built on collaborative respect and confidence.
Purchase Agreement Negotiation
The LOI is intended to summarize the proposed transaction terms in preparation for the definitive agreement which will supersede the LOI and finalize the transaction. Based on the original LOI framework, buy and sell side legal teams negotiate the definitive purchase agreement and translate the agreed upon business terms and assumptions into a binding legal contract. Critical purchase agreement categories include representations and warranties, indemnification caps and baskets, working capital pegs, escrow or holdback provisions, and non-compete scope and duration.
You do not want to hire a litigator or an estate attorney to manage a transaction the same way you do not want a Physics teacher in your English class. It is critical to hire competent M&A attorneys who have extensive transactional experience across a variety of industries. They will limit the number of document turns which will save you time and money. Both parties should expect to negotiate an equally weighted set of documents in good faith while simultaneously working to finalize financing conditions alongside the lender’s third-party requirements for closing.
Transition Planning and Pre-Close Preparation
Maturity comes with time and a lot of reps. It is why experience carries immeasurable value. Your business insight has value to those who do not have it. It is quite possible you will be offered a consulting role or asked to stay on board post transition to help the new team adjust.
It is important to separate your value from the business value and be flexible to multiple options post-closing and define those options throughout the transition planning process and establish clear expectations. Seller post-closing consulting is a critical transition role that helps integrate the buyer operationally. While the SMP team targets buyers who are agreeable to reasonable seller transition expectations, buyers always ask for more consulting at the LOI stage. Once they learn about the operation through the diligence process both parties generally agree to practical terms.
Customer, vendor, and employee introductions are critical to a successful transition, but they are unique to each business. You will need to collectively determine when to engage with key relationships and how to communicate the transition message. There is no universal truth when it comes to announcing a transition, so it is critical to determine the least disruptive manner. In addition, and in conjunction with legal documentation, buyer and seller will map out transitional daily operational flow, coordinate transition timeline, training schedule, and consulting arrangements prior to close.
Closing
Congratulations, your years of hard work and preparation have paid significant dividends. You have successfully navigated the due diligence process, agreed to terms memorialized in the definitive purchase agreement, and established a transition timeline with agreed upon responsibilities for both you and the buyer that will dictate a seamless transition.
Now that all documents are signed, funds are wired, and the transition begins, you are almost there. It is critical to remember a few key contractual terms and provisions that you can expect to manage from closing through the end of transition, and potentially beyond.
- Working capital (calculation based on closing date balance sheet) true-up date
- Escrow or holdback monies maturity date(s) set aside per the purchase agreement
- Seller post-close transition responsibilities and consulting period parameters
How to Protect Your Deal Between LOI and Close
Any time we see a lack of transparency and inconsistent communication, an inability to move according to process timeline calendar, and or incomplete or inconsistent reporting, it is generally a sign that we need to slow down and realign motivations, priorities, and expectations.
The SMP Capital team works diligently to connect with groups who are deal friendly and will not waste a business owner’s time with unserious buyer candidates. We ask that business owners remain focused, make the transaction a priority, and work with us diligently on information requests and following along the prescribed transaction timeline to close. A few thoughts:
- Buyers look for consistency between marketing materials and empirical data
- Due diligence surprises cause re-trading, delayed closings, and broken deals
- Continue to operate your business as if the transaction will never close. Material changes or adverse operational decisions will create an opportunity to re-negotiate terms
- Respond to diligence requests quickly. Delay signals disorganization or latent problems
- Do not make major changes to the business operation (minimize major new hires, significant capex, and contract changes) that will negatively impact the transition and buyer post closing
- Stay aligned with your M&A advisor on communication, timing, and strategy
Next Steps
Running a business is a full time job; so is managing an M&A transactional process. Business owners more than double their workload and degree of anxiety when entering a transaction without professional representation. There is an array of variables and impasses that professional business intermediaries like the SMP Capital team can mitigate before they become problematic, saving you time, money, stress, and business value.
You expect deep learned, researched, focused experience and decisive expertise when you hire a specialist and not every business intermediary is created equally. Experience, industry expertise, and understanding of deal nuance are critical earmarks of talented M&A professionals and you will want the most experienced and accountable team to represent such an important process for you and your family. The SMP Capital team has spent the last 25+ years incrementally improving our business advisory services platform while getting thousands of reps working on hundreds of sell side transactions in just about every industry.
We want to bring a carefully curated list of qualified buyer prospects to the conversation early. We never stop negotiating on your behalf. From financial review prep, business valuation, hiring a professional M&A team, engaging buyer prospects, LOI analysis, due diligence coordination, legal documentation, and finally to closing, we never stop working to generate the most positive result possible for you and your shareholders. We can get your business closed and get you off to your next adventure or business opportunity. We hope to be of service to you.
Considering selling your business? Talk to us. Book a free consultation with any of our local specialists and learn what your next chapter can look like.