In Selling Your Company, Don’t Slack on This

One of the biggest mistakes a seller can make is to quickly accept an LOI that appears to meet the seller’s primary expectations. The parties then enter the extensive process of consummating the transaction, a large part of which is negotiating the PSA. And in that process, the seller discovers that they have expectations about key understandings that are diametrically opposed to those of the other party. A common example arises where the LOI specifies that the PSA will have reps and warranties ordinarily found in such agreements. Well, therein lies a bomb just waiting to detonate.

For example, a buyer expects a seller to rep that there is no potential litigation affecting the business. The seller will not rep to anything other than they are unaware of any potential litigation. In other words, will it be an absolute rep about a condition or a rep about knowledge of a condition? Many a deal have blown up over such disagreements.

At the same time, you don’t want to negotiate every element of the PSA in the LOI, or you will spend a fortune on lawyers and likely blow up the transaction before you really get a chance to gain valuable traction in the transaction.

So, we recommend working closely with your lawyers to define the absolute must-haves in an ultimate agreement, and the nice-to-haves. There will always be a risk that a deal falls apart in negotiating the PSA, but your objective is to minimize that risk. A thoughtful LOI is a means of accomplishing that.

Now is a good time to read – and I will post them shortly - about those key PSA terms that you will want to anticipate in the LOI.

Deposit or no deposit? The usual practice in sales of businesses of all size is to not require a deposit as is normal in the sale of homes. We are not sure why this practice never evolved. We recommend that you request, outside the LOI and prior to signing the LOI, a proof of financial capability. This can come in many forms, but the best way is to simply ask, “Can you please provide me with documentation proving how you will pay for my business?” That might be a bank statement or a letter from their lawyer or CPA that states their client has the resources to close the purchase.

GROW and SELL Advisors, wholly-owned by Traversi & Co., LLC, is a premier sell-side M&A advisory firm – a boutique investment bank – serving the lower middle market.  Visit us here.

For a short video clip on this topic, click here.