Submitting an LOI
When you are serious about a business, you will do your homework on the prospectus and any confidential materials you need to place an offer.
You don’t want to spend a whole lot of time with the seller and seller’s representation if you don’t have to. In a M&A deal, this will make you appear not so legitimate.
Go through the materials as best as you can. If there truly is missing info for you to place an offer, then reach out to representation and request for the missing items or questions. The best way to do this is to be brief and create a shortlist. Many times, you might have an impulse reaction to talk to the owner. It really depends what kind of fence they put up. Synergy is truly important, so you will need to see if you vibe with the owner. Everyone has a different style and you and the owner might like to chat and be very candid and open. If that is the case. Other sellers are more conservative, and want something serious before they even spend time with a prospect.
The best way to move a deal forward is by presenting a legitimate offer that the owner/seller will accept. This could be a cash deal, a bank financed deal, or a partially seller financed deal.
If you really want to speak with the owner or management before, try for it but it is better to submit an offer (albeit verbal or written) with attaching proof of funds. This will put the seller at ease that you are serious and it will avoid a litany of questions facing around qualifying you or seeing if you have the means or ability to embark on this.
When you present an offer, best practices are for you to draft a formal LOI, or an IOI. A LOI simply means a Letter of Intent. An IOI simply means Indication of Interest. Either could suffice, but a LOI is typically a little more serious. However, both are most likely non-binding unless they have a non-refundable deposit attached to it.
A LOI should include basic terms:
– Exact dollar amount offer
– If there is an earnout spell it out
– Date of Closing
– Whether there is financing from a bank involved
– It should be in the form of a Letter if possible why your firm is a great fit
– Any broad terms that should be agreed upfront – This is not a contract so don’t include a bunch of legal terms that can be disputed.
– Whether there is exclusivity or not.
– Are you providing any equity to the seller
In terms of price and dollar amounts, the offer does not always have to align with the asking price.
You should adjust the price based on the value of the company itself. You should use the asking price as a gauge of the seller’s valuation however.
This is important to understand. Most M&A buyers who have lack of deal flow, generally are low-ballers. They are looking for a deal. That’s great, but it will limit your deal flow greatly to only those sellers looking to get out immediately. Those types of businesses are distressed business sales, and generally can have a lot of value if you pick the right ones, but many of them also have some weaknesses in the business you will have to overcome. If you are inexperienced and/or don’t have complements already built that fit into bringing this distressed asset/business into your ecosystem, then you often will be behind the eight ball simply because you are not acquiring something with stellar processes or systems. Remember, the seller wants out for a reason.
If you cannot determine dollar amount upfront in an offer, you can create a range if the exact price will be determined during due diligence. You can also use a multiple of EBITDA.
Remember, as much as you want a deal, the seller is looking to understand you are aligned on price before opening up all their books and taking time up for due diligence. You want to understand if you and the seller are aligned.
Place a range with a floor if due diligence reveals some things that accentuate some weaknesses, and put a high ceiling if it really is matching up.
We have seen some deals change because there are add-backs or because the EBITDA was slightly overstated from the P&L’s.
This is what due diligence is for – to really check the numbers are matching what you anticipated, there is synergy, and the business can continue forward with proper systems that are there. The goal of due diligence is to eliminate surprises.
At the end of the day, we want you to get a good deal.
The way to structure that is to try to achieve their valuation in a creative way. You should guarantee the cash with what you value the company on. We help our clients get the deal done with you only coming in with cash for what you think the business is worth while providing the seller what they want in a creative way of earnouts and incentives.
If you do include an earnout, then you might want to consider collateralizing that or attaching a promissory note. If you show proof of funds with the ability to cover everything (not just using their business to fund the earnout), this will make the seller feel more comfortable as well. For a seller to accept, they must feel protected.
Don’t be surprised if the seller rejects exclusivity if there is no deposit attached.
If you are providing equity, please specify very clearly what you are offering. Is this in the form of rollover equity as in there is a new entity taking over the assets or you are buying x% of their existing company – spell that out so there is limited confusion. I can’t tell you how many sophisticated M&A firms lose rapport with an inexperienced seller because they put over a complicated document that makes it confusing to the seller what is happening. Do not expect your seller r the seller’s representation to just get it. First off, your offer might be trying to pull the wool over the seller’s eyes. No one really appreciates those kinds of offers, and if you have an experienced representative on the deal, you will break rapport. It is a bit more difficult to come back from a deal once you lost the trust, faith, and confidence of them by giving them an offer that makes it look like you are trying to steal their company in a sophisticated way. Be thoughtful and cognizant of the terms you put together.
We do not guide our buyers to do fully seller financed offers. That can only be accepted as an option in limited scenarios and you risk offending the seller and seller’s representation out of the gate.
You want to put forth a proper LOI that really gets into the heart of the matter. That you are aligned on a price that makes sense and that you are the right company to take this over.
Contact us for your next acquisition:
Phone: (800) 773-1523
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Leader in Acquisitions with Expertise in Representing Sellers & Buyers on Deals
Jarbly is a leader in acquisitions with expertise in helping with listings, negotiations, LOI's, asset purchases, company purchases, and real estate purchases. JARBLY has access to high net worth individuals if you are on the sell-side and businesses that may be of interest to you if you are on the buy-side.