From LOI to Close – What Could Possibly Go Wrong?
You reached the very difficult decision to sell your business. It took a while but you formed your deal team to help you through the process. It took somewhere around a year of ups and downs, joys and disappointments, many meetings, baring your soul like you never thought you would and then finally you signed the Letter of Intent or Terms Sheet. “Whew. What a relief!” Hold it. As I tell my clients, now the work really begins. If you thought the last year was hard, wait until you see the next 90 days.
Many deals fall apart in this last crucial phase. If you know what’s good for you, you will pay particular attention to at least the following points.
- The Letter of Intent (“LOI”) which lays out the price and terms of the deal is mostly non-binding. It is contingent upon a successful Due Diligence Process, execution of a Definitive Purchase Agreement, a financing commitment and often an approval by the buyer’s Board of Directors. Sometimes, not always, the Buyer might agree to a price simply to win the auction. He knows that he will find something in the Due Diligence to “re-trade” the deal – to force the price lower because he found something bad that you didn’t tell him about earlier. The Due Diligence process behooves you to be forthright during the marketing of the deal and to be cooperative and fully transparent during this investigatory process. Your objectives are not to surprise the Buyer with anything during this process and to provide him with all the information he requires. Illuminate, do not obfuscate.
- In the old days all the Due Diligence information used to be well organized and put into folders or binders. This data would be sequestered in a private space or held offsite in a special designated hotel room. In either case the Buyer’s team would come in and pour over it. Now, take advantage of current technology and contract to establish a Virtual Data Room (“VDR”). This is a password-protected website into which you scan in all the data you will need. It can be organized into various levels of detail for easy perusing by the Buyer. The time to begin doing this is the day you form your company. Start putting all your key documents into your VDR. When you start doing this early you will have established a discipline for continuing to do it in the future and, you never know, somebody might come knocking on your door to buy your company when you least expect it. You will be ready!
- The deal making process up to this point has been so arduous to many Sellers that after the LOI is signed they think the business is as good as sold. They not only breathe that deep sigh of relief but they, in effect, stop or cut back their efforts to run their businesses. Their energy isn’t what it used to be and the businesses begin to drop off in the first month and then the second month and then the third month. The Buyers get cold feet and walk away. It happens.
- Since price and terms in LOI’s are non-binding many Sellers do not get their lawyer involved until after they are signed. It’s probably a good idea to pass the LOI by your lawyer before you sign it but if you don’t and at this point you go out to find a lawyer – be careful! Mergers and acquisitions is a specialized field and although you want to keep your personal lawyer informed, it is a good idea to choose a lawyer to do your deal who has vast experience in buying and selling companies. Even if you’re a seller, working with a lawyer who has worked on the buy side is an advantage. There is nothing more valuable in getting a deal done than an excellent lawyer. It will be money well spent.
- Keep your people informed. Sellers go about this in different ways employing different ideas as to creating the perfect timing to do it. But if you haven’t inform ed your people yet, this is the time. Sellers usually feel that their employees will be totally shocked. They seldom are. They can feel it in the wind. If you are of “a certain age”, stop kidding yourself. Of course you are going to sell someday soon. They are only worried about who the buyer will be and will their jobs be protected – not necessarily in that order. These last 90 days are so hectic. Strangers are going to be traipsing through the company and you have run out of excuses why. When you announce it, ask your employees to help you and become a part of the process. You might even consider “stay until it’s over” bonuses. When your team pulls together everything will go smoother.
From LOI to close. What could possibly go wrong? The answer is “Plenty” if you are not prepared and careful.