How creditable is the offer?
Once the letter of intent is signed, the company goes off the market and due diligence begins with one buyer. This means that the seller should assess the likeliness of the buyer being able to close the transaction before it closes the doors on other potential buyers. Some of the questions the seller should ask are:

• Is the buyer relying on the bank to provide financing for the deal? If so, is the bank on board?
• Has the buyer thoroughly reviewed the selling memorandum (the “book” that presents the company for sale, usually prepared by the transaction intermediary representing the seller)?
• Are there any issues resulting from the memorandum that need to resolved before the transaction advances any further?
• What is the buyer’s approval process? Does it require Board of Directors’ approval?

The seller should also ask the transaction intermediary what the track record of the prospective buyer is in approving purchases that have made it to LOI stage. Has the buyer completed the due diligence on past deals, and not gone through with the purchase? If not, why not? Determining that a suitor is a perennial “run-away bride” can save the seller considerable time and money.

Non-compete agreement
The vast majority of business sale transactions include a non-compete agreement, however, the terms vary widely depending on the individual situation. If the seller is selling a guard business, can the seller open an alarm business? What if the seller has an alarm business, can they then open an investigative business? What if the seller moves to another part of the country, can they start up a security business there? The answers to these questions need to covered off in the non-compete agreement, if the seller has any intention of pursuing opportunities such as those listed above.

In conclusion, any seller of a business needs to consider the many items discussed above, prior to signing a letter of intent. Prepared correctly, an LOI not only maximizes the probability of a successful transaction, but also tends to “smoke out” situations that are likely lead to a closing, thereby saving time, money and protecting confidentiality in the process.

Rhonda L. Downey, CA, CPA, CF,MSM, is the President of Regelle Partners Inc.