Negotiations and Letter of Intent (LOI)

After executing the non-disclosure agreement (NDA) and providing information necessary for the Buyer to evaluate your company and estimate its value, the primary stage of negotiations begins, consisting of meetings with a variety of decision-makers within the Buyer.

The true purpose of the meetings at this stage is to either establish a conceptual agreement within the corporation regarding the purchase of your company, or to terminate the negotiations. Owners of small and medium corporations often have difficulty understanding that the decision-making process in a corporation differs from that of a small private company. In a corporation, the process leading to a positive decision is built up gradually though developing relationships with several leaders within the corporation to the point where most of the leaders are in agreement to buy your company. Otherwise, the deal is likely to collapse.

It is commonly believed that the main objective of the negotiations is simply getting the maximum price for your company. This is not fully sufficient. The main goal is to obtain the maximum amount deposited to the bank account of the seller(s). It is important to remember that for the seller, it is almost always more important to focus on how and when the money is received, and not just on how much.   Therefore, price negotiations, which usually end with the signing of a letter of intent (LOI), are only the beginning of a long process of negotiations. Unfortunately, company owners are often only focused on serious preparations for discussions regarding the price, and do not pay sufficient attention to negotiating the terms of the structure of the transaction.

 Preparing for Negotiations

In order to successfully prepare for negotiations on the price, at this state sellers need to prepare their arguments regarding expectations. We strongly advise that you bring a professional negotiator. You will only win your negotiations if you have individuals with you who have already been involved in these types of negotiations. It would be naïve to underestimate the buyer’s site. Remember that you will likely be negotiating with people who have done this professionally for several years.

Find out in advance how many people will take part in the negotiations for the buyer, and what positions they hold within the organization. It is advisable that you bring an approximately equal number of participants. It is not recommended to negotiate alone. This poses too great a risk of a psychological breakdown. Remember that you will likely be negotiating with people who have done this professionally for several years.

Negotiations are better held on neutral ground or your own place of business. Under no circumstances should you agree to negotiate at the buyer’s place of business. The fact of the matter is that once the buyer’s representatives have travelled together and arrived at the talks, they are unlikely to depart without coming to an agreement. On the other hand, if they are at “home”, your party will be at a disadvantage as soon as you have arrived.

The roles of all participants should be rehearsed several times before the formal process begins, including question and answer sessions. This will be of great help to you.

Remember to thoroughly document the agreed upon date, since the letter of intent (LOI) will be drawn up on the basis of the agreements.

 The Structure of the Transaction

In preparing for the negotiations, sellers must determine for themselves not only a reasonable valuation, but also an acceptable structure for the transaction. In particular, it is important to consider the maximum length of the transition period (if any), the payment schedule, rights of former owners during the transition period, and other important points. Experienced consultants should be able to help the owners consider all possible options, and to define a strategy for the negotiations. A simple example might have the owners agreeing to a longer transition period in exchange for a larger sum of total payments.

 The Letter of Intent (LOI)

The letter of intent is an important milestone in the process of selling a company. In most cases however, a letter of intent is not a document that will commit the parties to anything (a so-called non-binding agreement). Basically the document just declares INDENT.

The objective of the LOI is to describe the structure of the deal agreed upon during negotiations. Since this agreement is subject to a detailed inspection of the purchased company (due diligence), the final terms may be less favorable than outlined in the LOI if the inspection reveals some type of undisclosed risk.

Often, the opinion of the lawyers is to achieve a detailed description of the conditions of the proposed transaction within the LOI. This is not always wise. Sometimes there are situations in which sellers strategically benefit from not clearly defining the conditions in the LOI. This allows sellers to maintain some degree of maneuverability at the later stages.

When it comes time to sign the LOI, the buyer will likely try to limit the seller’s right to conduct parallel negotiations with other buyers. Sellers are advised to utilize negotiations on this point to their own maximum benefit.