In my last blog post, I described an undesirable outcome in the purchase of a business. In that example, the purchaser failed to properly prepare to transition customers to the new ownership, and as a result likely lost significant revenue. When someone is exploring entering into a transaction to buy or sell a business, I’m often reminded of Maria von Trapp’s sage advice to the Von Trapp children in The Sound of Music as she taught them to sing, “Let’s start at the very beginning. A very good place to start. When you read, you begin with ABC. When you sing, you begin with Do Re Mi.”
Unfortunately, in purchasing or selling a business, many business owners fail to “start at the very beginning.” And what exactly is the beginning? A letter of intent, of course! A good letter of intent is a roadmap. What exactly will this purchase and sales transaction look like? Do the buyer and seller really agree? Remember, the devil is in the details. The parties may appear to agree on the basic terms of the transaction. But, when those pesky details begin to be teased out, the transaction may not work well for one or both sides. A proper purchase and sale of a business is punctuated by a thorough, well-written agreement, which has been drafted by an attorney, and then carefully reviewed by the attorney representing the other party. Then, typically, it’s renegotiated and revised several times until both parties are in full agreement. As you can imagine, this process can involve considerable time, energy, and attorneys’ fees. The more extensive the back and forth exchanges between the two sides become, the higher the attorneys’ fees. How frustrating would it be if both sides spend thousands of dollars on attorneys’ fees, only to ultimately find out that they actually do not agree on key terms of the transaction, so the transaction fails to fall into place?
A letter of intent is designed to help purchasers and sellers avoid that fate. A letter of intent outlines, often in significant detail, the specifics of what the parties ultimately will agree to in the process of transitioning the business to new ownership. Like the purchase and sale agreement, a letter of intent can involve a significant amount of back and forth exchanges between the two parties and their lawyers. But, unlike a purchase and sale agreement, a letter is, at the end of the day, a letter. It’s generally not nearly as expensive and time-consuming to prepare the letter as compared with preparing the purchase and sale agreement itself, which is often accompanied by numerous exhibits and documentation. If the parties walk away from negotiating their letter of intent, their losses tend to be relatively inconsequential as compared with having the transaction fall through later in the process. And, once the letter of intent is agreed to and signed, the purchase and sale transaction tends to become much more streamlined and cost-effective.
What kind of details related to the transaction should be outlined in the letter of intent? I will discuss that in my next blog post so, as Maria von Trapp might say, “Stay tuned.”
Photo credit: Hamed Saber on Flickr