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Just an LOI?

“Hell’s bells, Jim, it’s just a non-binding LOI, please get him to sign it and let’s get on with this thing.” Bart (not his real name) was unhappy with me.  My first clue was this call came in at 6:30am. “You told me our LOI was going to be signed three days ago, what’s the hold-up? I have bankers and investors waiting to hear.”

I explained to Bart that my client liked the deal and that I was 90% certain he intended to sign the letter of intent (LOI). That made Bart feel slightly better, but he also knew that until the LOI was signed, we had a right to continue to negotiate with other potential buyers. Bart was afraid the deal was slipping away, though I told him I had stopped shopping the deal to other buyers. In fact, my client was pleased with the deal Bart had offered and had instructed me to tell another interested party we had begun to focus our discussions with one buyer.

I had been working on the sale of this medical supply business for over a year. My client was also anxious to get the LOI signed because the business had some issues that caused other interested parties to walk away. But, even though Bart’s offer was definitely within the range of my client’s expectations, I wasn’t going to force my client to sign the LOI until he was fully ready to do so. His hold-up was making sure he understood how the deal would be taxed. His accountant was on vacation, and until she could render an opinion on the tax implications of Bart’s proposal, my client was not going to do anything.

Bart seemed suspicious of my explanation. I’m certain he assumed we were purposefully stalling in hopes of finding a better deal. That’s why he was pushing to get the LOI signed. You see, his proposal included the standard “no-shop” clause that prohibits the seller from negotiations with other parties. The reason this is standard language in an LOI is that the signing of the LOI starts the due diligence process when the parties begin to spend money on in-depth financial analysis (a/k/a quality of earnings report), operational reviews, and of course, legal documentation.

So, while Bart was right that the LOI was non-binding, he was wrong in believing my client should sign it without first reviewing its implications. The LOI binds the seller to not shop the deal and it starts a process that will be expensive and time-consuming. That’s why I encourage my clients to be careful about signing an LOI. While it is technically non-binding, it presents other limitations that should be considered. So don’t be pressured, even if a call comes in before the sun comes up.

JIM CUMBEE is President of Tennessee Valley Group, Inc. a retainer-based business brokerage and transition mediation firm in Franklin, TN.  Cumbee is an attorney and has an MBA from Harvard Business School. Jim is the author of Home Run, A Pro’s Guide to Selling a Business. .  He has a wide range of corporate and entrepreneurial experiences that make him one of the most sought-after business transition advisors in the state of Tennessee. The principles above are true, but the names and fact patterns are changed to preserve the parties’ identities.

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Tennessee Valley Group

Jim Cumbee established Tennessee Valley Group to help business owners fulfill their dreams for life after business ownership. It’s a mission that his 30+ year career history had prepared him well for—in addition to being an attorney, transition mediator and business broker, Jim has been a buyer, seller, and entrepreneur. His broad range of experience gives him unique insight into how business buyers and sellers can achieve their goals.

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