Thursday, December 06, 2012

7 Things To Do Before Signing a Letter of Intent

Approximately $1.9 trillion in business assets (or 310,000 businesses) are poised to change hands over the next 5 years, increasing to $3.7 trillion (or 550,000 businesses) over the coming decade.  This will be the biggest transfer of Canadian business control on record. [1]
What are the implications to business owners in Canada?
The increasing supply of businesses for sale will create a buyer’s market, putting downward pressure on sale prices.  Without a proper plan, business owners will find themselves selling at a significant discount to those that come to market prepared.
If you are planning to sell your business in the coming decade there are a host of things you need to consider to ensure a successful transition, including being prepared for the day you receive a letter of intent (LOI) from an interested buyer.
Having an attractive business provides you with leverage, but only up to the point where you sign a LOI which will likely require you to terminate discussions with other potential buyers during the due diligence process.
After signing the LOI, the balance of power in the negotiation swings in favour of the buyer, who can then take their time investigating your company.  With each passing day you will likely become more psychologically committed to selling your business.  Savvy buyers know this and can drag out diligence for months, coming up with things that justify lowering their offer price or demanding better terms.  With your leverage diminished and other buyers sidelined, you are left with the option of accepting the inferior terms or walking away.
Seven initiatives to focus on, even before putting your business up for sale, to minimize this power shift include:
  1. Have "successor" clauses in your customer contracts - these ensure that the obligations of the contract survive any change in company ownership.
  2. Nurture and prepare a list of 10 to 15 "reference-able" customers - a potential buyer will want to ask your customers why they do business with you and not your competitors.
  3. Ensure your management team is on the same page - a potential purchaser will want to interview management, without you in the room, to ensure everyone in the company is pulling in the same direction.
  4. Consider getting audited financials - an acquirer will have more confidence in your numbers and will perceive less risk if your financial statements have been audited.
  5. Disclose the risks up front - every company has some risk factors. Disclose up front what the company’s plans are for dealing with its weaknesses and threats.
  6. Negotiate down the due diligence period - do your best to reduce the due diligence period from a period of 60 or 90 days to between 30 and 45 days. If nothing else, you'll alert the acquirer to the fact that you're not willing to see the diligence drag out past the agreed-upon close date.
  7. Make it clear there are others at the table - explain that, while you think the acquirer's offer is the strongest and you intend to honour the "no shop" agreement, there are other interested parties at the table.
You may not be actively looking to sell at the current time but you will exit your business one day.  Focusing on these seven things will help you protect the value of your business as the balance of power begins to shift away from you in negotiations with a potential purchaser.
1.   Inadequate Business Succession Planning – A Growing Macroeconomic Risk, CIBC In Focus November 13, 2012.

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