In our first two blog posts in this series we discussed preparing a list of potential acquirers and a couple of strategies to contact them. In this post we will discuss milestones and some of the typical documents you may encounter in the process.
The first sale milestone is arriving at a memo of understanding or MOU. The MOU is a document describing a bilateral or multilateral agreement between parties. In the sales process it usually indicates the desire to work out the preliminary purchase and sales issues to allow both parties to sign a letter of intent or LOI.
An MOU is often used in cases where parties do not yet want to imply a legal commitment. In essence it is a more formal alternative to a gentlemen’s agreement. The MOU process allows you to proceed with several companies at the same time, keeping more options open.
The next step is more formal, the signing of a letter of intent or LOI. The LOI is a document that outlines the terms and conditions of an agreement between two parties before the agreement is finalized. Such agreements may be Asset Purchase Agreements, Stock Purchase Agreements, Joint-Venture Agreements etc., basically any agreement which aims at closing a financial deal.
LOIs resemble written contracts, but are usually not binding on the parties in their entirety. Many LOIs, however, contain provisions that are binding, such as non-disclosure agreements, a covenant to negotiate in good faith, or a “no-shop” provision promising exclusive rights to negotiate. The purposes of an LOI are to 1) clarify the key points of a complex transaction for the convenience of the parties, 2) declare officially that the parties are currently negotiating, as in a merger, sale or JV, and 3) provide safeguards in case a deal collapses during negotiation.
Some time before the LOI is signed, the selling company should perform their own due diligence on their business with the help of a trusted advisor. As the business owner, you should know where the potential issues are. First, you should look to fix as many as possible. Second, you should disclose the remainder to the potential buyer. Buyers use due diligence issues to negotiate down the price of the business. Disclosing them at the LOI level takes that card out of their hand. Some owners feel that some issues will go undetected. That, however, seldom happens with a savvy buyer.
The final steps in the process are the negotiations and closing. There are books written on the negotiation process itself. Suffice it to say that if the up front work is done well, uncovering the value your buyer perceives, the internal due diligence and negotiating the LOI, then the final negotiations should be much easier. For more information and insights on selling your business, just complete the form of the right sidebar to download our e*book Exit Planning: The Guide for Business Owners.