Letter of Intent (LOI) When a transaction opportunity presents itself, many small business owners turn to their local lawyer who may have experience in general corporate matters, real estate and estate planning but has very little expertise in the various business, accounting, tax and legal matters that need to be addressed to ensure a favorable transaction for a client selling their business that has financially supported their family for many years. The thought of seeking out a specialized M&A attorney to handle a sale transaction is many times deemed unnecessary.
Many owners think a sale of their business is a simple matter best handled in a 2-3 page letter of intent (“LOI”) drawn up between the two parties. Unfortunately, the LOI is not a binding contract and is merely an expression of intent between 2 parties about material deal points that will eventually end up with a definitive contract of sale. To make matters worse, many times an owner’s local lawyer is not even consulted in advance as to what material terms their client should include in the LOI to avoid future problems when it comes time to prepare the definitive sales contract.
The above example is all too commonplace and is a recipe for disaster. Instead, a seller and buyer should embrace and follow these basic principles:
- M&A transactions have significant tax ramifications- understand a shareholder selling stock in a company vs. the company selling its business assets.
- All lawyers do not have M&A expertise merely because they have handled other business contracts.
- Always have a fulsome LOI prepared by a lawyer and not do it yourself lest you find that material business points were never discussed or agreed upon.
- An LOI is not the last word on the deal- it is but a summary outline of certain material terms agreed upon.
- Be prepared for additional business, tax and legal points to be negotiated post LOI and reflected in the definitive contract of sale (i.e., a Stock Purchase Agreement or an Asset Purchase Agreement).
- Do not assume the contract of sale is a standard contract with boilerplate language that all parties use in a transaction.
- Always read the contract of sale and ask questions if any provisions are unclear or seem irrelevant.
- If buyer — seek seller’s representations, warranties, covenants and indemnifications about the assets being purchased.
- If seller – offer buyer limited representations, warranties, covenants and indemnifications concerning the assets being sold.
Check out our Letter of Intent Merger & Acquisition Video
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