Most owners sell one business in their lifetime. But selling a business is very different from selling anything else you may own.
To maximize the sale, the seller should understand the process of a sale or transaction. Sellers typically start with a simple thought or urge to sell: “I’m ready to sell” or “I want to sell.” From that point, how do you prepare? What’s involved? As you move through the process, what documents will you see?
One of the first and most important documents you will see is called the letter of intent (LOI). This is the backbone of the deal. This document can be described as a deal in principle that sets up the asset purchase agreement (APA), which is the deal in detail. The LOI is typically three to five pages, whereas the APA can be 10 to 100 pages. The LOI has several basic components for which you should prepare.
The following items are fairly standard in LOIs for the pest management industry:
✔ Buyer’s assumptions (the best guesses the buyer has made to make the offer that gets proven by the buyer during due diligence). The standard and general assumptions to be proven are:
- Revenue and profit.
- Customer base and related details.
- Recurring base of business.
- Fleet data.
- Employee-related data.
- Accounts receivable.
- Buying is based on these primary assumptions. After due diligence, the offer may go up or down. If you are prepared with sound information prior to going to buyers, your offers should be stable or go up.
✔ Deal structure (either asset or stock purchase; in almost all cases asset). Without limitation, the buyer will receive at close, and allocate value to:
- Goodwill (customer lists and details — all active, pending and canceled accounts).
Company names, websites, etc.
- All supply related to the business, such as inventory and equipment, furniture, software, computers and intellectual property.
- All accounts receivables.
- Fixed assets and fleet.
✔ Excluded assets (items the seller is not selling). These should be disclosed up front and can include:
- Seller’s cash and securities.
- Insurance rights and policies.
- Seller’s personal belongings, such as vehicles, phones and assets.
✔ Purchase price and terms. This critical part of the LOI may include:
- Cash paid at close.
- Money paid in a note for a number of months at an acceptable interest rate.
- An agreed amount for accounts receivables (A/R) — usually dollar-for-dollar under 90 days paid at close based on an A/R report run the morning of close.
- Money for non-compete of owners (all buyers require non-compete clauses).
- Money for transition services or a consulting agreement with the seller.
- Rents and utility if applicable, and other assets.
✔ Human resource (HR) liabilities. Some HR liability where the company or seller owes the employee benefits can include:
- Vacation owed.
- Sick pay owed.
- Savings plans and pensions transferred.
- Accrued compensation from seller.
- Any employee liability should be determined during due diligence, and is typically a credit to the buyer to satisfy with employees after the deal closes.
✔ Specific employee matters will be addressed and include items such as:
At close, the buyer will typically offer all employees employment based on the employee passing the buyer’s best practices — drug testing, motor vehicle report/driving record check, criminal background check, etc.
Consulting agreement, which the seller could address as well. This includes pay per month, hours per week, duration (six to 12 months is standard), and benefits (such as medical, dental, car, phone, vacation) offered to the seller in a consulting capacity if any are offered.
✔ Termite retreatment obligations after the deal closes may be addressed. If there are any possible retreatments, and retreatments after the close exceed an agreed determined amount, the seller will be notified immediately prior to the retreatment and that amount will be credited to the buyer from future funds. This is a very rare event that can be negotiated.
✔ Buyers will be responsible for ongoing business-related liabilities (such as rent, utilities, uniforms, printers, software, internet, phone directory advertising, etc.) that are specifically and legally transferred to the buyer.
✔ Fleets may be delivered debt-free, which is a standard requirement. If the seller has a fleet lease, it can be transferred to the buyer.
✔ A non-compete clause for sellers is a standard requirement. Keep in mind the non-compete clauses should be written based on the state statutes that exist in the state(s) where the business is owned and operated. Non-compete clauses can be negotiated, but the size of the sale will dictate the buyer’s flexibility on the agreement.
✔ The time and location for due diligence is specified. Typically, this process is completed within 60 to 90 days from the signed agreement of the LOI, but the size of the deal can influence this timing.
✔ The closing date should be in the LOI, with a definitive date for close. It is typically 60 to 90 days post-LOI or sooner. A date is needed for the accountability of the buyers and to demonstrate clear intent from both parties.
✔ Exclusivity is almost always in the LOI, with a no-shop provision for the seller.
✔ Confidentiality, whereby both buyer and seller agree to keep the transaction and terms confidential until close, is a safety mechanism for all involved — just in case something happens and the sale fails.
✔ Once the LOI is signed and agreed to, the APA typically comes from the buyer’s attorney and reflects the terms of the LOI in detail. It typically is parallel to due diligence.
It is important for all involved to keep in mind that an acquisition is a process, and the LOI really reflects the intent for both a buyer and a seller. The LOI is the backbone of all the other documents that will follow, from the APA to schedules and exhibits and the like. LOIs can be different based on the deal and the buyer; however, these components are standard and help all involved understand what is being sold and purchased, what the compensation is, what the timing is, and what may be excluded. It is strongly suggested that an LOI be a foundational part of any sale.
Kemp Anderson is president of Kemp Anderson Consulting. He helps business owners and executive leadership navigate the divesting and merger and acquisition process, through post-integration activities, business strategy and implementation, and transaction negotiation.ORIGINAL ARTICLE