Do you have a "done deal" when you receive a letter of intent?
Most business owners answer with a resounding "yes."
The truth of the matter is that a letter of intent is anything but a "done deal."
Your liquidity event is a marathon and not a sprint. The letter of intent is the start of the marathon.
When it comes to your letter of intent and liquidity event, ignorance is not bliss.
Your future buyer is counting on you to make mistakes. Every mistake you make lines your future buyer's pocket with your hard-earned money.
Who am I, and how do I know?
I said "no" to a 7-figure offer and "yes" to mastering the art of the sale. Two years later, I said "yes" to a 9-figure offer.
What made the difference?
I created a 9-step road map of preparation that gave me the certainty to capture maximum value. Today, I pay it forward and help business owners prepare through a 90-day system.
The 90-day system, called the Deep Wealth Experience, teaches you the 9-step road map. You create a blueprint to help you optimize value. You also have the certainty of capturing maximum value on your liquidity event.
The 9-step roadmap helps you think like your future buyer. You learn how to find and remove the skeletons in the closet. You also learn how to find the hidden Rembrandts in the attic and put them out for public display.
When you master the 9-step roadmap, you're now in a position to increase your enterprise value.
There are five critical areas for a letter of intent that every business must know.
Do you know what these five areas are?
Every moment of resistance to temptation is a victory - Frederick William Faber
When it comes to your letter of intent, many buyers hope you'll make mistakes.
Every mistake you make lines your buyer's pocket with your hard-earned money.
In the letter of intent, many buyers will use the bait and switch technique for non-binding items.
Non-binding items to pay close attention to include:
The power of non-binding items is the fact that your buyer is not obligated to honor them.
Many buyers will use the enterprise value to lull you into a sense of false security. It's not uncommon for buyers to put a high enterprise value with the intent to lower it after due diligence.
When it comes to the deal structure, buyers will want a structure that's best for them. You need a structure that is best for you for taxes and liabilities.
You want a deal structure that minimizes taxes.
Speaking of maximizing the money you receive, be aware of the earnout and escrow.
Your mission is to remove an earnout and have the smallest escrow possible.
You no longer control the business. With your loss of control in the business, the buyer can manipulate the business to lower profits. At this point, you can say goodbye to your earnout.
Look to the letter of intent as the start of a conversation. Now is the time to negotiate in advance what you want.
You keep your leverage and negotiating power until you sign the letter of intent. Now is the time to craft the letter of intent with the key deal terms you want.
Now is the time to remove the earnout, find out the consequences of financing, and minimize an escrow.
There should be no surprises after due diligence. A well-defined letter of intent ensures that you know what to expect.
When it comes to your letter of intent, do you know the one thing you must avoid at all costs?
Success is where preparation and opportunity meet - Bobby Unser
When it comes to your letter of intent, ignorance is not bliss. Most buyers send a letter of intent that looks after their interests.
Beware of the letter of intent that includes walkaway fees.
What are walkaway fees?
Walkaway fees protect your buyer. You walk away from the deal and you pay a penalty to the prospective buyer.
The letter of intent specifies the amount of the penalty you pay.
As part of the strategies in the 9-step roadmap is having an auction for your liquidity event.
The power of an auction is two-fold. First, an auction keeps buyers on their best behavior. Second, an auction gives you a choice amongst buyers.
A detailed letter of intent helps avoid surprises at the end of the process. Both parties have negotiated the essential deal points upfront.
Despite a detailed letter of intent, situations may arise where a deal is not possible. Your auction gives you the ability to leave the deal table to speak to another buyer.
A walkaway fee acts as a deterrent both mentally and with your bank account. Avoid a walkaway fee at all costs.
The power of an auction is choice. With choice comes power. Exercise your power by walking away. Better yet, have your investment banker communicate your preference well in advance.
No matter how detailed and strong a letter of intent you have, do you know the one thing you give up when you sign it?
Make fair agreements and stick to them - Confucius
Despite a strong and detailed letter of intent, you lose two things when it's signed.
Do you know what these two things are?
Power and leverage.
A signed letter of intent prevents you from speaking to other interested buyers.
Mot buyers will demand as long a time as possible for the exclusivity period. Buyers will claim that they need time to perform due diligence and a detailed analysis.
Buyers are correct, but up to a point.
A buyer deserves to have a reasonable amount of time to perform diligence to decide if the deal makes sense. The goal of your buyer is to have as much time as possible.
A long exclusivity period can cause deal fatigue and has the buyers lose interest. Neither scenario is good for you.
Your mission for your letter of intent is to have the shortest period of time. A short exclusivity period is yet another reason for the importance of preparation.
The better prepared you are, the less time your buyer needs. During your liquidity event, you must prepare for the worst and hope for the best.
Preparing for the worst means that the deal with the current buyer doesn't work out. The saving grace is your ability to speak with other buyers through the auction process.
A well-written letter of intent is a snapshot of the ultimate deal terms. Smart business owners craft a letter of intent that leaves nothing to chance, and so should you.
Do you know the other letter of intent term that is as important as exclusivity?
Speed always favors the seller - Jeffrey Feldberg
In your letter of intent, expect your buyer to want due diligence to be as long as possible.
Buyers use due diligence to confirm that the deal makes sense and to lower enterprise value.
Speed always favors the seller. The more time required to close your deal, the more risk you face that the deal won't close.
Had my 9-figure deal closed two weeks later, there wouldn't be a deal.
Two weeks after my deal closed, the Great Recession started. The first market to feel the impact was the bond market, which the buyer used to finance the deal.
As a seller, put a time limit on due diligence and have the time as short as possible.
How do you achieve a short due diligence time?
There are many advantages of the 9-step roadmap. One of the main advantages is that you prepare before starting your liquidity event.
Steps four and five of the 9-step roadmap focus on an internal due diligence audit to achieve two things.
Preparation increases both your enterprise value and deal certainty.
When you're prepared, you can insist on a shorter due diligence period and receive it. The buyer is hard-pressed to find reasons not to agree with you.
And if the buyer does give push back, you have other buyers to turn to in your auction process.
Do you know the three deal points you need in your letter of intent?
The starting point of all achievement is desire - Napoleon Hill
Three deal terms that can make or break your liquidity event.
The three deal terms you must work out and agree upon in your letter of intent are:
It's easy to lose sight of the fact that you have a life after your liquidity event. Given a choice, your future buyer wants a far-reaching non-compete.
Don't leave your non-compete to chance. Before your liquidity event, you must know what you want. Spend the time and effort to ensure your non-compete works for you.
You have the highest leverage before signing your letter of intent. Use your power to ensure specific deal points are either included or left out of the deal.
Ensure you look after your employees. While you may not be able to control the future for all employees, you can protect key employees.
There's a good chance that some of your key employees are on your advisory team. Take care of your employees, and they will take care of you. All the money in the world doesn't give you a clear conscience.
Most business owners underestimate the importance of the governing law. Assume that you'll have issues after the deal closes.
The governing law dictates which laws apply to a dispute and the location of a potential trial.
Governing law matters if your buyer is on another continent or across the country. Ensure your letter of intent has you comfortable with governing law.
Taking care of the three deal terms today gives you peace of mind for tomorrow and beyond.
Your letter of intent is your best opportunity to secure the deal terms you want.
A detailed letter of intent prevents unwanted surprises at the end of the deal. It's the same letter of intent that identifies the buyer with the best cultural alignment.
When you master the 9-steps of preparation, you achieve two important things.
First, you create a blueprint to optimize the value of your business. Second, you now have the certainty of capturing the maximum value in your liquidity event.
The best time to prepare was years ago. The next best time is today. Whether your liquidity event is in one year or ten years away, the time to prepare is today.
What do you do, and where do you start?
There are five key areas your letter of intent must address. Plan out in advance what want in each of the five areas. Communicate your deal points and no-fly zones to your advisory team.
It's your advisory team that helps to set the stage for future buyers of what's needed to get the deal done.
Your liquidity event is the most important business event of your life. Make your liquidity event count through high-quality preparation.
Here's to you and your success.
Your Raving Fan,