CEO Workshop – LOI Fundamentals

You received a letter of intent. What should you do now?

Some of the toughest decisions that owners and CEOs of second stage companies face come with the exit or succession of their business. At CEO Nexus, exit planning, exit strategies, success stories about business sales — and yes, missteps make up some of our most riveting conversations in our peer-to-peer roundtables.

We all cheer those who successfully sell and move on to their next business or a new stage in life. But deep down, we all fear what could happen if a business sale is not properly executed. Big issues can keep us up at night, such as: was money left on the table or are our employees protected?

I recently participated in a workshop featuring Jon Molayem, President and Founder of Acquivest. He provided some great insights.

Letters of intent are non-legally binding documents that lay out a pathway to close a deal, and outline payout at closing and earn out opportunities. They can either be part of an ongoing and planned exit strategy or they can show up unexpectedly.

Letters of intent deserve your best effort. You only get one chance to sell your business, so you need to make sure you understand all aspects of the letter of intent. Be sure to pay close attention to non-disclosures – you don’t want an unfounded assumption or inadvertent conversation harming a potential deal.

Molayem discussed how no two deals are ever the same. He has worked on hundreds. The number of variables to be considered can be daunting.

I was struck by number of thought-provoking items brought up during the presentation. Here are just a few points:

  • A letter of intent is a milestone and in no way the end of the conversation, but rather the beginning of the beginning.
  • A well-constructed letter of intent protects both parties. Details matter.
  • Watch your pocketbook. You need to keep a close eye on the working capital included in the deal.
  • Equity vs. Asset sale structure makes a difference…tax implications can be significant.
  • In the years of running your business, cash is king. With letters of intent, clarity is king.
  • For many owners, the earn outs can be the difference between getting what you need or closing with a sense of regret.
  • Most importantly, seek help from those with M&A experience – letters of intent set the stage for the final deal structure. It’s not a time to go it alone!

At CEO Nexus, we serve CEOs leading second-stage businesses. Our goal is to assist those CEOs by providing the context and connectivity needed to make better decisions about a range of business issues. In this case, how to interpret and navigate the minefield associated with the receipt of an unexpected LOI. To learn more, go to https://ceonexus.com or contact me directly at squello@ceonexus.com.

If you are a CEO Nexus member and want to know more about the workshop on Letters of Intent featuring Jon Molayem, Click here for access to the related PowerPoint Presentation.

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