HOUSTON BUSINESS REVIEW

TUTORIAL ON SELLING YOUR BUSINESS: “More Fundamentals on Selling” – Part II
By Ralph Fain

Ralph Fain is a principal in the R/ Fain Group, a professional business brokerage firm which confidentially represents the interests of sellers/ buyers of “Mainstreet to Mid Market” companies (revenues from $1MM to $25MM). Mr. Fain has over 20 years of broad business experience with Fortune 500 companies as well as with small/medium sized companies and has served in various capacities including Controller, Vice President, and President/CEO. Each week he will provide comprehensive information on the many aspects of buying/selling businesses.

Our last article dealt with one of the more critical aspects of selling a business – negotiating and closing the sale. After both parties are in verbal agreement as to the major terms (price, non compete agreements, method(s) of financing, what’s included/excluded in the sale, due diligence, etc), it is time to enter into a written agreement – either a Letter of Intent (LOI) or an Offer to Purchase (Purchase Contract).

A LOI is a non-binding document which contains the general business terms of the verbal agreement between the two parties – buyer and seller. As mentioned above, the terms would include the names of the parties (individuals or corporations), the business for sale, a general description of the assets (or stock of the corporation) to be purchased and/or excluded, liabilities assumed (if any), sale/purchase price, and the other terms/conditions of the agreement (e.g., seller financing – amount, rate, term, etc).

Again, note that this is not a binding contract but is simply a written understanding (and extrapolation of) the previously stated verbal agreement between the parties. The Letter of Intent serves as a basis for the formal document – the Offer to Purchase/Purchase Agreement. Once the LOI is agreed to by the parties, it is standard practice for the buyer to make a deposit (earnest money) and, generally, these monies would be placed in escrow or trust.

[Note that it is not necessary to go through the LOI step – a buyer can make a formal Offer to Purchase. Many businesses are bought without issuing a Letter of Intent. Generally, LOIs are used for larger transactions and in situations where buyers would like to “buy some time” – i.e., to either tie up the business for sale (i.e., take it off the market) or arrange financing or for a variety of other reasons].

Subsequent to the LOI, the buyer is now tasked with the responsibility to perform a process known as Due Diligence. The buyer may either conduct this procedure on his own, he may hire a CPA or other advisor/consultant to perform this for him, or, it may be a combination of both. We will be discussing the Due Diligence process in much more detail in our next article in this series but, suffice it to say, Due Diligence is the most critical step in the buying process.

Done properly, Due Diligence is a complete review of a business – it is not just the proving/validation of the financial results of the company, although this is certainly a critical component. Again, our next article will go into more detail but the Due Diligence process encompasses a review of operations, management, sales/marketing, systems and procedures, economic factors impacting the industry, etc.

Once the Due Diligence has been satisfactorily completed, the buyer now presents an Offer to Purchase/Purchase Agreement to the seller/owner. The Purchase Contract contains all the financial and legal details of the agreement and incorporates the terms/conditions and structure as had been previously contained in the Letter of Intent – with, of course, any revisions necessitated by the Due Diligence and agreed to by the parties. The Purchase Agreement is generally a much more detailed document than the LOI. The Purchase Contract, once signed/executed by the appropriate parties, is legally binding and conveys ownership from one party to the other. It should go without saying that attorneys for each side should be engaged to advise the parties and either prepare or review this contract.

As mentioned earlier, our next article will deal in more detail with the Due Diligence process. Upcoming future topics also include Non Compete Agreements, Earn-Outs, and, due to readers’ requests, additional information relative to Seller Financing.

As always, see you next time in this same space for our next article. Should you have any questions or require additional information please feel free to contact the R/ Fain Group at 832-646-0832 or via our web site.