Insights

From Letter of Intent to Purchase Agreement

Steps to Selling your Business Part 35.

The Closing Phase moves you from a completed Letter of Intent (LOI) through Due Diligence to the signing of the Purchase Agreement.

By this point, your M&A Advisors should have a robust and well-crafted Letter of Intent secured and in your hands with the best buyer with the highest certainty of closing. A well-negotiated LOI will have dealt with all foreseeable issues and prevents most delays.

We aim to target a closing date within 60 days of signing the Letter of Intent. At Stillwater, we work hard to get the key terms agreed upon early.

M&A Advisors have a critical responsibility in shaping the Letter of Intent. The LOI should front-load as many settled terms and agreements as possible and not leave them to be negotiated in the sale-purchase agreement.  

While most LOIs are nonbinding, it is to your great advantage to get as much negotiating done as early as possible. Don’t leave the hard work of agreeing until after the drafting of the Purchase Agreement. Avoid the “never mind; we’ll figure that out later” mindset; if you do this, you are saying, “let’s let the lawyer figure it out.” You will see the results of that disconnect in the end product – and your legal bill.

Make sure you cover off questions like:

What’s the purchase price, and how and when will it be paid?

How do the proposed earn-out terms work?

What about non-compete restrictions?

What limits will be placed on indemnification amounts and durations to protect you?

We like to get the answers to these questions set out in the LOI in the same way they appear in the Purchase Agreement.

Most importantly, we want the deal terms negotiated as business terms and included in the LOI, and then have the lawyers put those terms into the appropriate legal wording in the purchase agreement. To put it another way, while Lawyers have a pivotal role in the sale process, we want them to paper the results of the negotiations, not do the negotiations.

The Letter of Intent, once received, triggers the final hurdle to selling your company: a detailed round of Due Diligence.

Due Diligence is the all intrusive, detailed examination of your business before the Purchase Agreement is signed. You should expect it to be comprehensive, somewhat uncomfortable, and almost always it feels invasive.

At Stillwater, we give buyers access to our client’s virtual Data Room that contains all of the Due Diligence documents. Here they can scrutinize every aspect of our client’s company’s information from their own office. We start populating the Data Room early in the sale process.

In previous posts, I’ve often stressed the positive benefits that honesty, candor, and transparency bring to the process of selling your business; Due Diligence is another place where those benefits manifest themselves greatly.

A buyer can have two possible mindsets as they start the Due Diligence process – confirmer or discoverer. One is far superior to the other.

Keep the buyer in the mode of Confirmatory Due Diligence. This is a process by which the buyer confirms what you’ve already disclosed to them. They build and maintain trust in you, solidifying the LOI as the foundation for the final Purchase Agreement.

If the buyer finds information withheld or misrepresented at any point, a level of distrust and skepticism rises quickly. The buyer will soon shift into a mindset of Exploratory Due Diligence.

In Exploratory Due Diligence, the buyer acts as a hunter, and what they’re hunting for is more undisclosed information. They will look at everything with suspicion, and everything they find will damage your valuation; money in their pockets instead of yours, or in the extreme, they will walk away.

The only way to keep a buyer out of an Exploratory Due Diligence mindset is to hide nothing in the first place. That is why we encourage clients to adopt a policy of transparency and honesty from the very start of the process. Early disclosure is always best.

There’s an old truth in the M&A Industry: a deal rarely gets better for the seller between the Letter of Intent and the Purchase Agreement; adjustments tend to work in the buyer’s favor.

A great Advisory team committed to excellence will work hard to minimize disadvantageous adjustments. That is why it is critical to secure a Letter of Intent that does the heavy lifting before the final Purchase Agreement and a process of Due Diligence that is optimized to confirm the buyer’s understanding, not stoke their fears.


If you are planning to divest your business or have questions for one of our Advisors, please contact our team today.

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Written by: Douglas Nix