{"id":2769,"date":"2014-03-23T13:00:13","date_gmt":"2014-03-23T20:00:13","guid":{"rendered":"https:\/\/masonmyers.com\/?p=2769"},"modified":"2015-01-28T12:58:37","modified_gmt":"2015-01-28T20:58:37","slug":"letter-of-intent-to-closing-the-deal","status":"publish","type":"post","link":"https:\/\/masonmyers.com\/letter-of-intent-to-closing-the-deal\/","title":{"rendered":"6 Pitfalls Between Letter of Intent and Closing the Deal"},"content":{"rendered":"

When selling your business, it is so much work to find the right buyer and to get to a letter of intent.\u00a0 That may feel like the hard part.\u00a0 It is not.\u00a0 It is just as hard to manage everything that comes next and get to the closing.\u00a0 Below are some of the things that I have seen happen to friends who are both buyers and sellers.\"letter<\/p>\n

From Letter of Intent to Closing the Deal<\/h2>\n
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  1. Keep the business on budget and performing well.<\/strong>\u00a0 There is nothing more important during the two to four months it will take to close the deal.\u00a0 Among private equity buyers, you will hear wisdom shared from investor to investor with things such as, “95% of all bad deals were off budget during the closing process.”\u00a0 The buyer will be watching every twitch of the business with extreme scrutiny.\u00a0 To a buyer, there is nothing more comforting than seeing the financial results come in as expected.\u00a0 There is nothing more disconcerting that having the financial results be short and trying to decide if it’s a short-term blip or something more fundamental.\u00a0 In one recent situation where I was not directly involved, the seller lost several clients in late November that was going to reduce their revenue by >20% (probably only in the short term, but such wasn’t totally clear).\u00a0 They didn’t tell the seller until the December and January financial statements were ready, and it cratered the deal.\u00a0 They may have had a chance to save the deal if they had been up-front immediately.\u00a0 More importantly, they should have done everything in their power to keep those clients and keep the business on track (or presented more conservative financial forecasts that accounted for some potential lost clients).<\/li>\n
  2. Have scrubbed and analyzed your previously presented financial statements.<\/strong>\u00a0 Most serious buyers will perform a “Quality of Earnings” accounting due diligence on your company.\u00a0 This means that they will review, in detail, the financial statements that you have previously presented to make sure the earnings presented are high quality.\u00a0 It is inevitable that they will find various adjustments that make the earnings a bit better and a bit worse than expected — that is normal.\u00a0 However, it will save sellers a ton of time if they have performed their own analysis to find the unusual items or the items that the buyer may ask about.\u00a0 It is much more efficient to be prepared up-front than to scramble around trying to understand the questions yourself and to explain what the buyer may be finding.<\/li>\n
  3. Be organized.\u00a0<\/strong> The buyer will need all sorts of information about the financial results, legal, insurance, human resources, major contracts, etc.\u00a0 Of course, the seller wants the information to be strong and supportive of the picture that was painted during the sale process.\u00a0 Almost equally as important is how the information is organized and presented.\u00a0 Buyers appreciate indications that the company is well-managed and organized — such indications provide more confidence to the buyer.<\/li>\n
  4. Manage the business as if you are not selling (within reason).\u00a0<\/strong> It is a fact of life that not all deals close after a signed letter of intent.\u00a0 The seller needs to be aware of this and not make any major adjustments that they would not make if they were not selling the business.\u00a0 Do not change a strategy to fit the buyer until after the close.\u00a0 I would recommend keeping the buyer as informed as possible about any medium-size decisions that you are making, just so they are in the loop to avoid any surprises later.<\/li>\n
  5. Manage the lawyers — don’t let them manage you.\u00a0 Negotiate the business points yourself — don’t let the lawyers negotiate.\u00a0<\/strong> The lawyers view their job as doing everything they can to protect you, so they will always take the most conservative path and recommend the most protected, conservative position.\u00a0\u00a0 There is nothing wrong with that, but if both parties take that same stance, there is no room to find a middle ground that makes sense.\u00a0 The lawyers work for you. And you should have the confidence to tell them what you want, make the business decisions around the deal that you want, and do not let the lawyers manage you.\u00a0 Finishing the Letter of Intent does not mean that all the deal decisions are done.\u00a0 There are many more small details and decisions in the final documents, and both parties need to continue compromising and negotiating the details that are not covered in the Letter of Intent.<\/li>\n
  6. Communicate well.\u00a0<\/strong> Special effort needs to be made to communicate (probably more than you think) among all the parties.\u00a0 And, special effort should be made to think about the best methods to communicate everything.\u00a0 Never take a shortcut by firing off an email when a phone call would be better.\u00a0 Everyone is on edge, and making sure to communicate enough — and via the best method possible — pays off big time.<\/li>\n<\/ol>\n

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