Business Buying Masterclass #10: You're under LOI, Now What?

Introduction

Congratulations on making it through the toughest part: getting the seller and broker on board and finalizing your Letter of Intent (LOI).

Now, where do you go from here?

In today's session, our goal is to help you navigate the post-LOI deal roadmap.

Before we dive in, remember that no two transactions are the same.

Sellers and brokers may have strong opinions about timeframes, due diligence, and the overall deal process.

While it's important to be diplomatic, remember that when you're planning to invest millions of dollars, you don't need to walk on eggshells.

Always protect yourself against those dreaded busted deal fees!

Most transactions follow a similar cadence. Here are the general steps:

  1. Conducting Financial Due Diligence (and Renegotiating Terms!)
  2. Business Due Diligence
  3. Securing Your Financing (SBA or Conventional)
  4. Negotiating with Potential Investors (From Term Sheet to Subscription)
  5. Legal Due Diligence
  6. Negotiating Agreements
  7. Closing
  8. Post-Closing Considerations

As you navigate each step, it’s crucial to see the big picture and keep track of what still needs to be done.

Thank you for tuning in to the 10th session of this Business Buying Masterclass.

Let’s get started!

The Change in Leverage Positions

Once you're under an LOI with exclusivity, typically for 60 to 90 days (always ask for 90!), the leverage shifts in your favor as the buyer.

The seller is forced to remove the business from the market, granting you a unique position of influence—they are desperate to close the deal and you’re the only game in town!

This exclusivity period is crucial as it allows you to thoroughly evaluate the business without the pressure of competing offers.

Move expeditiously through this period… time kills deals!

Conducting Financial Due Diligence (and Renegotiating Terms!)

Now you get to open the hood and see what you're really buying!

We strongly recommend hiring a quality of earnings (QoE) provider that has an offering tailored for SMBs.

There are many… send us a message for recommendations!

You want to ensure that the numbers from the Confidential Information Memorandum (CIM) tie out to reality through a proof of cash and double-check that the add-backs are bona fide.

You’ll also want to smoke out issues like customer and supplier concentration, and declining financial performance.

A little insider baseball:

As of June 2024, about 60% of deals need to be renegotiated post-QoE or financial due diligence.

A common trap for the unwary is when financially sophisticated clients attempt to conduct their own QoE.

These transactions move fast, often involve poor bookkeeping, and inexperienced sellers. It’s better to let the experts handle it.

Also, working capital is often overlooked, and we'll do a deeper dive on this later in the course.

Business Due Diligence

Now, you need to get familiar with the operations of the business and confirm that you are properly equipped to run this type of business!

This means assessing everything from your ability to work with the type of employees in the business (who are often very blue-collar), to technical insider lingo and navigating industry diplomacy.

Understanding the day-to-day operations and the company's culture will help ensure a smoother transition.

Securing Your Financing (SBA or Conventional)

Securing financing is a key early step in the acquisition process.

Your goal: obtain a term sheet and commitment letter from an SBA 7(a) lender or conventional financing source.

There are many great lenders who specialize in large acquisition financing, and many excellent brokers who can assist in securing the financing.

Evaluating both SBA and conventional financing options will help you choose the best fit for your acquisition.

Negotiating with Potential Investors (From Term Sheet to Subscription)

Next, and likely simultaneously with your financing, you’ll want to have a meeting of the minds with your prospective investors.

They will look at you, the business, the acquisition terms, and the investment terms (more on this in future issues).

The goal is to get those investors to sign subscription documents and wire funds.

These investments are almost always governed by Regulation D, including Rule 506(b) and 506(c), and all investors should typically be accredited.

Pro tip! If you have a good deal, you will almost always find investors to support your acquisition. Don’t be afraid to chase a larger target than you might be able to afford on your own, as you’ll get the necessary down payment money!

Legal Due Diligence

Next, your attorneys will do a deep dive into the legal elements of the target.

The goal is to ensure that the target company is legally sound and that the transaction is structured such that the assets or equity you aim to acquire are transferable.

They’ll also verify that the business isn’t facing lawsuits and that the assets are not encumbered by liens.

Thorough legal due diligence helps prevent future legal complications.

Negotiating Agreements

Your counsel will negotiate the legal documents, from the purchase agreement to ancillary agreements, employment agreements, promissory notes, etc.

This process can range from very simple to very complex, depending on the specifics of the deal.

Clear communication and experienced legal guidance are key to successfully navigating this stage.

Closing

The closing process involves getting all documents signed and implementing the transaction.

This includes finalizing the purchase agreement, ensuring all conditions precedent are met, and transferring ownership.

A smooth closing is the culmination of all your due diligence and negotiations, resulting in the official transfer of the business.

Post-Closing Considerations

Post-closing, there are several considerations to ensure the ongoing success of the business.

These include implementing employee handbooks, improving customer and supplier agreements, and cleaning up the holding company structure.

Addressing these areas will help solidify your ownership and set the stage for future growth.

We’ll cover each of these topics in depth in future issues!

Disclaimers

Now for a few required disclaimers. Sorry in advance!

  1. This course is being presented strictly for educational and informational purposes, and not for the purpose of marketing any legal services or seeking legal employment and is not motivated by pecuniary gain.
  2. The opinions stated in this course from the authors represent the opinions of such individual author and not the opinions of any other person or organization.
  3. Nothing contained in this course or otherwise from the authors hereof is to be interpreted as legal, financial, tax, investment and/or any other form of advice. Please consult your own legal, financial, tax, investment and/or other advisors.
  4. The authors are not your lawyer, and no information provided in the course of this class or otherwise has the affect of forming an attorney-client relationship between you and the authors. In short, get your own lawyer!
  5. This course is being presented by The SMB Center LLC and has no affiliation or relationship SMB Law Group LLP.

About the Authors

The authors have worked for some of the most elite law firms in the world.

During their time in BigLaw, they regularly worked on transactions in the hundreds of millions to billion dollar plus range for some of the most recognizable companies in the world and have extensive experience with M&A.

The authors have since begun investing in select SMB acquisitions and have co-founded an SMB-focused law firm where they’ve collectively worked on billions of dollars in SMB-focused M&A.

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