Mergers & Acquisitions

M&A Talk Podcast

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Home Podcast Top 4 Issues for Sellers to Avoid with an LOI

Top 4 Issues for Sellers to Avoid with an LOI

Top 4 Issues for Sellers to Avoid with an LOI

Bill Snow

Investment Banker | Author

Negotiating a clear letter of intent keeps a seller’s position strong throughout the sale process. Bill Snow returns to discuss the top four mistakes sellers make with the LOI and his tips on avoiding these issues. He highlights the importance of planning for taxes and understanding the tax implications of a sale from the outset, how valuations vary and what can impact them, setting up a data room for due diligence before the LOI stage, the dangers of having unrealistic expectations, and the costs of not being prepared.

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Guest Profile

Bill Snow is an investment banker with over 30 years of experience in mergers and acquisitions, and he is currently with FOCUS Bankers. Renowned for his extensive expertise in representing buyers and sellers across diverse industries, Bill became a Managing Director at Jordan Knauff & Company in 2013. Prior to this role, he held a leadership position in the investment banking practice at Cambridge Partners & Associates. During his tenure at the investment bank Kinsella Group Inc., Bill provided valuable advice to middle-market business owners and executives on both sell-side and buy-side transactions.

In addition to his work in M&A, Bill has authored three books, including Mergers & Acquisitions For Dummies (Wiley Publishing, Inc.). He is a sought-after speaker across the United States and beyond, with international lectures in Malaysia and the United Arab Emirates. Bill holds an MBA and a BS in finance from DePaul University, and he is a registered Investment Banking Representative with FINRA, the Financial Industry Regulatory Authority.

Topics Covered

  • What is the importance of the letter of intent (LOI)? [2:23]
  • If there is not much detail in the LOI, does it work in the favor of the buyer or the seller? [6:15]
  • What are the four biggest mistakes sellers make while negotiating the LOI? [8:04]
  • Issue 1 – Not planning for taxes
    • How do accountants or tax advisors factor in the negotiations of an M&A transaction? [12:15]
  • Issue 2 – Understanding the tax implications
    • Why is it important for sellers to understand the tax implications of selling their business before they negotiate an LOI? [17:19]
    • What is a “country club valuation”? [18:45]
    • How accurately can a valuation be predicted? [24:43]
    • How can synergies with strategic buyers impact the valuation and purchase price? [26:49]
  • Issue 3 – Lack of preparation
    • What tends to slow down LOI negotiations the most? [32:11] 
    • Why is it so important to have a data room populated with all of the documents necessary for due diligence before signing the LOI? [36:05]
    • How much time and money does the typical buyer invest in due diligence? [39:58]
    • What can happen if a seller is unprepared or has incorrect information in the data room? [44:09]
  • Issue 4 – Unrealistic expectations
  • What is an example of a lesson learned from having mistakes in due diligence paperwork? [47:24] 
  • What does the country club number really mean, and how does it vary from an actual purchase price number? [49:28] 
  • What role do earnouts play in negotiating a transaction? [53:31] 
  • What should a seller know about an escrow account that is tied to reps and warranties? [56:04]
  • What is the most important lesson for sellers? [59:21]

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Resources Mentioned

 

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Acronyms or Terms Used in This Episode

  • LOI: letter of intent
  • Strategic Buyers: A buyer or company that may provide similar or complementary products or services to the target company. The strategic buyer is often a competitor, supplier, or customer of the target or one that brings other synergies to a potential acquisition.
  • PE Firms: private equity firms

To suggest guests, topics, or questions for future podcast episodes,  contact Morgan & Westfield.

Acquired

Acquired

The Art of Selling a Business With $10 Million to $100 Million in Revenue

Written by Jacob Orosz, President of Morgan & Westfield

For a business to sell for what it’s really worth – or even more – you need to properly prepare. But too many entrepreneurs put off planning the sale of their business until the last moment. Acquired – The Art of Selling a Business With $10 Million to $100 Million in Revenue will help you prepare your business for sale and walk you through the sales process, dodging the pitfalls along the way. With a significant amount of your wealth tied up in your business, planning your exit is one of the most critical initiatives you’ll undertake.

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