Signing a LOI does not mean you’ve closed the deal.  In many ways, you’ve only just begun.  LOIs usually include a “lock up” period of exclusivity which prohibits the seller from talking with other potential buyers.  This results in a power shift to the buyer’s favor.  

Once the LOI is signed due diligence begins.  Due diligence means “opening the kimono” and providing the buyer with intimate details of the business including but not limited to financials, customer information, pricing detail, sales pipeline, contracts, employee compensation, and more.  What happens if a buyer, especially if that buyer is a direct competitor, walks away after reviewing all this sensitive data?

Prior to signing that LOI, a seller should take time to determine if the buyer is “real” and whether that buyer can close the offered deal.  Since that’s a rather subjective comment, here are 14 issues a seller should consider when selecting a buyer:  

1. Is the deal too good to be true?  That great deal may be nothing more than a Trojan horse, setting up a scenario where the buyer says, "I want to do the deal as we agreed, but my bank and/or investors is/are balking..."
2. How is the buyer planning to finance the transaction?  Do they have the cash, are they planning to tap a bank line, or are they asking you to help with the financing?
3. Will the buyer – especially a buyer already in your industry and market – “recrunch” the numbers during due diligence and decide it is easier/wiser to invest that same money in the existing business as opposed to paying instead of overpaying for your company? Will they use this as a cudgel to renegotiate the deal?
4. What is the form of the offer?  Will 100% of the proceeds be paid at closing? Any hold back? Any contingent payments or seller note or earn out? Are you swapping stock?
5. How much of the proceeds will be placed in an escrow account?  What are the reps and warranties associated with that escrow?  Who controls the release of that escrow?
6. Does the buyer need to raise cash from outside investors to finance the deal?  Will outside investors balk at the deal the buyer has on the table?
7. Is it a stock or asset deal? Does it make a difference to you?  Have you talked with you accountant about your specific tax situation?
8. Who takes AR?  The AP?  Are your currant assets and current liabilities all within terms, or are you facing a substantial post closing adjustment? 
9. Is your inventory 100% salable?  Will the buyer claim some inventory is unsalable and use that as a means to reduce price?
10. Does the deal include a working capital adjustment?  What is the basis of that working capital amount?  Any other post closing adjustments?
11. Who pays off any long term debt, you or the buyer?
12. What happens to the line of credit?  Assumed by buyer? Do you pay it off?  Is the buyer going to take over the company but leave you on the hook for some/all of the company's debts?  This is more common than you may think.
13. What are the tax implications of your AR?  Will this amount be taxed as ordinary income?  Have you talked with your accountant about this issue?
14. Are you signing a non-compete agreement with buyer?

 Analyzing offers from multiple buyers can often involve alchemy.  Total deal value is a key concern, of course, but so are many, many other issues.  An owner seeking to sell a business is wise to retain capable, professional, and experienced council – investment bankers, accountants, attorneys, wealth advisors – to help negotiate the best deal possible…and safely land that deal.  Remember, it’s not a deal until the wire transfers clear.

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