From LOI to close: Buyer’s playbook for the legal process of acquiring a business
Over the past several years, I have bought a number of small, closely held businesses, including professional firms like law firms. Along the way our team has learned that the legal process of getting a deal done is not something to hand off entirely to counsel and wait. This is because many times, lawyers may have drafting and negotiation experience but aren’t too helpful at driving the transaction to its end while helping buyers make decisions. Buyers who understand what’s happening at each stage — and why — will close their transaction, on better terms, with less drama. My brother and I just published a book (Available Now) to help buyers in transactions understand the different phases of a private business acquisition. Here are some highlights that will be useful for potential buyers and their counsel.
Treat the LOI as a confidence-building document, not a granular term sheet
The letter of intent’s (LOI) real job is to convince the seller, and often the seller’s family, that there isa credible buyer with a real plan for the business — not to nail down every mechanical detail. Better to front-load the LOI with an operating plan, background and general structure of the transaction (price and terms) and save granular deal mechanics for the definitive purchase agreement. Keep it non-binding, and treat deposit requests outside a court-supervised sale process as a non-starter in negotiations.
Send the first draft of the purchase agreement
Before a first draft of a definitive agreement goes out, it’s important to flag every clause where abuyer could end up owing the seller more money above the purchase price, especially in the working-capital section. Boilerplate templates further reconstituted in AI often bury clauses requiring further advances from the buyer even when that has not been agreed to (but will certainly come to light if things go wrong). For example, a common misunderstood clause in template drafts include that any excess working-capital on paper must be paid in cash by the buyer within days of closing, even if the working capital (cash, receivables, etc.) does not exist in reality.
Expect an adviser on the other side who wasn’t part of the original conversation
Sellers of small businesses often have a long time lawyer or accountant or financial adviser — we call this person the “Bennett” — who wasn’t consulted before the LOI was signed and shows up once the deal is underway determined to “protect” the seller. Their advice isn’t necessarily wrong, but it’s rarely disinterested: a closed sale usually means the end of a long, billable relationship. Expect this adviser to slow things down, but don’t take it personally. The important point is that in a negotiation, any new deal terms or context needs to be framed either direct to the seller or with the seller involved with counsel — don’t let their adviser be the one who first frames it for them.
Know which diligence findings actually matter
Real deal killers are narrow: title defects, material tax exposure, financials that don’t match what was represented, litigation that threatens the business, or outright misrepresentation. Everything else —most redline comments, most “material” qualifiers, most indemnity language — is advisers doing their job, which sometimes means overstating risk that will never materialize. Understand plainly which issues are real and which are theoretical, and use disputed points as trading chips in negotiation rather than fighting every one on principle.
Hold the ground on holdback security
f seller financing is part of the deal structure through a note and a bank is also involved, the bank will typically require the seller to subordinate to it through an intercreditor agreement. Sellers and their advisers sometimes push back hard here, worried about being left with nothing if the deal goessideways. Stand firm — this is standard in acquisition financing — but be ready to offer something in return, like a higher interest rate on the seller’s note or a clause accelerating payment if the business is sold. What shouldn’t be offered is a personal guarantee from the buyer; the seller isn’t a lender and isn’t entitled to lender-level security.
Keep momentum, always
Once the LOI is signed, the process moves at the pace set by the buyer. Answer emails quickly but take your time when you need financing to catch up — but never let the deal go quiet. A stalled process is when sellers get cold feet. Check in regularly, keep something moving, and get to the closing table before the seller starts wondering if this was worth it.The majority of private business transactions do not close. This is because buying and selling businesses is not a passive process left to professionals to take care of like the purchase of a house.Nor is it necessarily adversarial. But it requires constant negotiation and presentation to the many stakeholders involved. Too often buyers defer to professionals like lawyers and accountants who defer judgment back to their clients. Ultimately a successful transaction requires all the parties working in tandem to ensure that everyone understands the issues at each phase. This will reduce surprises post-closing and create a relationship between buyer and seller to work through any potential issues along the way.
This article was originally published by Law360 Canada, part of LexisNexis Canada Inc.: