Managing the Sale Process:
The Letter of Intent – More is More
Words to Live By When Negotiating the LOI
Business consultants are fond of saying: “Less is More”, but when it comes to the right strategy for negotiating a letter of intent (“LOI”) to sell your QSR business, we say: “More is More”. Here’s why:
The Seller’s negotiating leverage is highest when prospective buyers are competing to win the mandate to buy your business. When suitors are jockeying to catch the eye of the princess, they dress to the nines, send flowers and bring chocolates, but once betrothed, the bridegroom has a tendency of turning into Seth Rogan, (or for the older folks in the audience, Al Bundy or Archie Bunker). Once the winning bidder has the deal locked down under a formal LOI, the other contenders quickly lose interest and move on to the next deal. When that happens the Seller invariably turns from the hunter to the hunted.
The goal of the Seller should be to craft a thoughtful and robust LOI which will provide the complete framework for the transaction. The detail and the legalese will follow in the APA, but all of the major deal points need to be articulated and agreed to prior to committing to a Buyer. In a traditional QSR deal the usual areas of focus are:
• Deal timelines
• Reps and warrants
• No shop provisions
• Purchase price allocation
• Indemnity standards and limitations
• Expense allocations
• Due diligence standards
• Standards for assignment of contracts
• Requirements for lease assignment
• Environmental review protocol
• Title review protocol
• Employee transition issues
• Non-compete requirements
• Deposit protocol
• Included assets
• Excluded liabilities
• Protocol for assignment of contracts
• Buyer financing contingencies
Sophisticated buyers will push hard to keep the Seller focused on the purchase price and seek to leave as many critical deal points open as long as possible. The smart Buyer knows that the longer he can delay committing to the details, the greater the likelihood the other bidders will have moved on and the fewer concessions he will need to make to retain control of the deal. Deferring the negotiation of the major deal points until the APA phase will all but assure that the Seller is ceding important negotiating leverage to the Buyer. Experienced buyers know that once a Buyer has been selected, the Seller is typically loath to restart the auction process and that a deal that comes back on the market runs the risk of being stigmatized as a “broken deal”.
Waiting to negotiate the critical deal points until the APA has the added disadvantage that the process will be adjudicated by prickly M&A lawyers with billing rates higher than the GDP of Costa Rica. A thoughtful and well crafted LOI negotiated between the business people will dramatically simplify and streamline the APA process.
While you can count on the APA process being about as pleasant as getting a root canal when trying to get over a bad bout of the flu, at least with a thorough and well-crafted LOI, it will be much tougher for the buyer to re-trade previously documented positions on key issues.
A rigorous LOI process has the added benefit of flushing out the contenders from the pretenders. If a buyer is going to be quirky, difficult or inflexible, better to know it before other potential buyers have been chased away.
Prospective buyers will use a variety of excuses to avoid being pinned down on deal terms during the LOI process:
Objection: “I don’t want to spend a bunch of legal dollars before I have a mandate to buy the business.” Response: Agree. There is no reason for lawyers to be heavily involved in the LOI process. The LOI process is about the business people developing the framework of the deal and that process is typically most efficient and effective when the lawyers are not driving the discussion.
Objection: “I don’t want to spend a bunch of time on a non-binding LOI and then go over the same issues when negotiating a binding APA.” Response: The LOI will provide the framework for the deal and we have no intention of re-visiting the major deal points already negotiated in the LOI during the APA process. The APA process is designed only to fill in the details of the previously agreed to deal points.
Objection: “My CPA is too busy right now to review the purchase price allocation.” Response: No problem, our CPA has already done the work.
Objection: “We can’t be expected to review all the contracts before we even have a deal.” Response: We don’t. The QSR business is not contract dependent. There are typically only a few critical contracts the majority of which most buyers are already very familiar.
Objection: “That’s not the way we do it.” Response: Ok, next Buyer, please.
The LOI is undoubtedly the most critical document in the entire sale process. Make sure you give it your full time and attention.
INVEST THE TIME IN THE LOI. IT WILL PAY BIG DIVIDENDS.