Want to Buy a Business? Letters of Intent 101

A properly crafted Letter of Intent (LOI)  is an important step after making the decision to purchase a business.

(Please note this is NOT legal advice.  Please retain an attorney familiar with local laws and customs before you finalize any purchase agreement).

The Letter of Intent is drafted by the Buyer and their advisors to inform the Seller (and their advisors) of the Buyer’s decision to formally discuss purchasing the business for sale.

The Letter of Intent is a preliminary document where the Buyer and Seller “agree to agree”.  Changes and edits can be made to the Letter of Intent to satisfy both parties.

The Buyer will have disclosed their financial standing and resources to the Seller already and signed a Non-Disclosure Agreement.  The Seller will have shared  financial information with the Buyer and provided a Confidential Business Review.

The Letter of Intent sets the due diligence process in motion.

“Ten Steps to Increase the Value of Your Business – click here to download today.

Discuss with your advisors what you need to include in your letter of intent. Now is the time to ask questions, receive advice and process information about important decisions.

There is no typical Letter of Intent since each business sale is unique. However, there are some standard features:

Purchase Price: The purchase price is the total amount the prospective buyer will pay for the business.

Financing Specifics: Describes the basic deal terms such as down payment, financed amount (either through bank or seller), and if necessary, contingency details. If you intend SBA financing, all variables (other than payment of a fixed amount note) must be fully determined by one year from the closing date.

Due Diligence: The due diligence clause outlines the length of time the buyer has for their investigation process on the business. There should always be a clear start date and end date

Basic Conditions of the Sale including (but not limited to):

Earnest Money:  To confirm the buyer’s seriousness about buying the business, the LOI will include a set amount  of money paid to confirm the agreement. This protects the seller if the deal does not happen and time and expenses are lost.

Expenses: Outlines who pays what expenses.

Expiration: Details the termination of the agreement presented

Closing or Conditions of Closing: Usually outlines the high level details about closing the transaction, what the parties anticipate. Some of the items that can be listed here are closing date and any important contingencies, by either party. Decisions about who will write the final contact would be stated here.

 

We have found that asking what the minimum or maximum of something (price, down payment, seller financing, etc.) tends not to be productive.   It is almost impossible to get specific on a part of the transaction without have a reference to the whole offer.  The answer will always be – “it depends.”

Connect with Harvest Business Advisors today – email info@harvestbusinessadvisors.com or call 443.334.8000

Often to protect themselves, buyers add earn-out or claw-back clauses.  At a high level, this means buyers would tie payments into resulting cash flows.  Usually we use revenues because any other cash flow (such as profit) since it is hard to agree on later.  An example from a recent transaction is:

  • Last 3 years average revenues was $1,300,000.  If revenues from the 12 months following closing are less than $1,235,000 then the price will be reduced $1 for every $2 of revenue loss.  The price will not adjust beyond the $130,000 note amount and will be offset against the note to the extent the note is outstanding.

Arrangements for sellers to stay involved with the business beyond the closing or other milestones would also be included in a Letter of Intent.

A well-written Letter of Intent should bring parties together and help lay out terms as a way to reduce the risk of litigation and set the course for a successful deal.

We are happy to answer questions about Letter of Intent or guide you through this negotiation process.

It is an intricate dance.

In the end, with patience and perseverance, a Letter of Intent can be created that everyone can live with at the time of negotiation and be quite pleased with one year later.

 


Clients choose Harvest Business Advisors for our accurate business valuations and our consistent ability to deliver the highest price in the smoothest sale transaction possible. Harvest provides business brokerage, business valuation, and business succession planning services. We have extensive experience in the information technology and professional services, manufacturing, distribution, and contracting fields. We maintain offices in Maryland, New Jersey and Virginia. Connect with us at info@harvestbusiness.com or 443.334.8000 to discuss selling your business, ordering a business valuation or buying a business.

Harvest Business Advisors opens Princeton, New Jersey Office

Harvest opens up Business Brokerage and Business Valuation Office in Princeton New Jersey serving Philadelphia to New York City.

Harvest Business Advisors, Lower middle market merger and acquisition advisors, business brokers, and business valuation experts has opened up an office in Princeton, New Jersey.   Greg Caruso, Partner said, “Princeton is the perfect location to service business buyers, business sellers, and people needing business valuations in New Jersey and Eastern Pennsylvania markets.  We can easily serve business brokerage and business valuation customers in Philadelphia, PA, Cherry Hill, NJ, Trenton, NJ, Newark, NJ up to New York City.  We are excited to have this second location to better serve our expanding business brokerage and business valuation base.  The New Jersey office phone number for Greg Caruso is 609-664-7955.

Business Valuation of Construction Contractors, A Webinar for the NACVA

Gregory Caruso, Esq., CPA, CVA, Partner at Harvest recently recorded a live webinar on business appraisal or business valuation of Commercial and Heavy Construction Contractors for the National Association of Certified Valuation Analysts (NACVA).

Want to know more about building value and selling your construction company – Click here to download a 20+ page e-book. 

Harvest as a valuation expert has valued many construction contractors, subcontractors, and suppliers.  As business brokers Harvest has sold many construction contractors, subcontractors, and suppliers.  Greg spent many years working as a project manager and estimated are a large general contractor and was an owner of a speculative homebuilder that delivered 70 homes in peak years.  He combines this background with his accounting and valuation practices to give an up to date primer on what is different and what to look for when valuing contractors.  Greg has provided business valuation and brokerage services for all types of contractors from general contractors, to subcontractors such as HVAC, plumbing, electrical, to material suppliers, and to engineering firms.  Click here for a link to purchase and listen to the webinar. 

Connect with Greg  Harvest Business Advisors today – email info@harvestbusinessadvisors.com or call him at 609-664-7955

Business Valuation and Business Appraisal Annual Meeting in New Orleans

The National Association of Certified Valuation Analysis (NACVA) held their annual meeting in New Orleans.  Greg Caruso, a Principal at Harvest attended.  Greg is both a business broker and a CPA, CVA business appraisal and business valuation expert.  “It was another great conference with many high level presentations.  I continue to learn and be able to better serve my clients by applying what I learn at NACVA conferences.”  Harvest Business Advisors performs business brokerage services in Maryland, New Jersey, Virginia, Pennsylvania, and Delaware.  Harvest provides business valuation services in Maryland, New Jersey and nationwide.

Connect with Harvest Business Advisors today – email info@harvestbusinessadvisors.com or call 609-644-7955

BizBuySell reports sales of businesses are at an all time high

Biz Buy Sell reported that sales of small businesses are at an all time high.  They reported that businesses for sale in Towson – Baltimore, Maryland metro area had an asking price that was a 3.1 multiple of cash flow.  In the Philadelphia, Pennsylvania area small business asking prices tended to be about 3 times cash flow also.  New Jersey’s small business for sale asking price multipliers are about the same.  Biz Buy Sell is used by business brokers to advertise their for sale small business listings.   The report is based on data compiled by BizBuySell through the 2nd quarter of 2015.  Additionally it was reported that there continue to be increases in new listings and in the sales prices of businesses.

Click to read article:  Sales of Business’s are at an all time high.

Clients choose Harvest Business Advisors for our accurate business valuations and our consistent ability to deliver the highest price in the smoothest sale transaction possible. Harvest provides business brokerage, business valuation, and business succession planning services. We have extensive experience in the information technology and professional services, manufacturing, distribution, and contracting fields. We maintain offices in Maryland, New Jersey and Virginia. Connect with us at info@harvestbusiness.com or 443.334.8000 to discuss selling your business, ordering a business valuation or buying a business.

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