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What Should You Include In Your Letter of Intent (LOI) When Buying a Business?

letter of intentThe first step of buying a business is the buyer signing a Letter of Intent or "LOI" which shows the seller that the buyer is serious. A LOI is a formal non-binding offer to buy a business from a seller. Even though LOIs are mostly not binding, they are still important to the business purchase because they include the essential terms of the deal. So what should your LOI include?
  1. Purchase price
  2. Whether the sale will be an asset sale or a stock sale
  3. No-shop clause, which prohibits the seller from accepting other offers
  4. Terms the buyer insists on in order to move the deal forward. A common example is a buyer often requires the seller's key people to remain in the company to help the transition.
  5. Deal-breakers
  6. Buyer's right to access seller's documents and financials
  7. Confidentiality clause
  8. Non-binding clause, to remove any doubt that the LOI is non-binding
  9. Timeline or expiration date for the LOI

Be Careful About Adding Too Much to Your LOI

Buyer beware, though! If a buyer puts too many key terms, it may start looking like a purchase agreement. The court considers the following factors to determine if it is binding or not: (1) whether the agreement will be put in writing; (2) the level of detail contained in the letter of intent; (3) whether ...

What is Due Diligence?

due diligenceDue diligence is the process of examining the business details and data when buying a business. It's similar to inspecting a home before closing on the house. A buyer will want to check, to name a few things, the financial health of the company, the quality of the standard operating procedures, manuals, policies, tax, legal, and other liabilities. The buyer gets this information by requesting it from the seller. In addition, the seller can get information from third parties such as a tax clearance from the state, to see if or what outstanding taxes the seller has, and liens on any equipment.

Why is Due Diligence Important?

The most obvious reason why the due diligence process is important is that the buyer gets to see what he or she is really buying. A buyer shouldn't take the seller's word about the value of the business.  Another less obvious reason is that if the seller lies to the buyer about anything regarding the seller's company, the buyer will have no leg to stand on in court because the court will note that the buyer did not bother taking measure to prevent being a victim of fraud. (I published a whole article on this topic). Lastly, due diligence is important because it forms the basis of the purchase agreement. For example, if, during due diligence, the seller's equipment was required to be ...

contract red flagsNo one likes to feel like they've been taken for a ride - especially in business and when your valuable time and money are at stake. So what are some common "red flags" in a business transaction or contract? Here are the most common contract red flags:

  1. Poor formatting and bad writing. You don't need even need to read a contract sometimes to know it's something you should run away from. Unfortunately, we've even seen some bad contracts come from other attorneys. The spacing is off, you can barely read the contract, and there is a lack of standard formatting. This indicates that a person who has no contract experience wrote the contract, or an attorney who is not well versed in contracts wrote it. This also raises the question of "if these people can't get a contract done right, what else is wrong, and do I want to do business with them?"
  2. Length of the Contract. The length of the contract will, of course, be different for different types of transactions, but when the length is totally off, it's a red flag. Are you entering into a 6-figure deal with a 3-page contract? Red flag. A

How to Buy a Business

buying a businessWhat are the steps of buying a business? Do you just exchange money and sign a few documents? How do you know if you should buy a particular business? How many questions do you get to ask about a business for buying as a buyer? If you are asking these questions, this article is for you.

First Things, First: Initial Discussions

The initial stage of buying a business is pretty informal. The buyer and seller will talk about the viability of the deal, gauge the interest of the other parties, and the seller may even provide financial information. During this phase, the seller may ask the buyer to sign a non-disclosure agreement (NDA) if the seller is sharing sensitive information with the buyer, especially if that information is related to finances. If the seller is represented by a business broker, then the broker may help the discussions and act as an intermediary between the buyer and seller. Valuation of the business also often happens during this stage. The seller will provide its EBIDTA and the buyer will take this information to her accountant to see if the financial calculation adds up. Based on the numbers, the buyer and seller will agree on a tentative purchase price.

Next: The Letter of Intent (LOI)

Once the buyer and seller both see that the transaction is beneficial for both of them and they are serious, the buyer will present a ...