Letter of Intent - Acquire.com Academy

All right, in this video, I'm going to be going over how to negotiate a letter of intent that closes a startup acquisition offer on your term. So an LOI is really just, you know, the first step of an acquisition process. You've had a good conversation. Typically they are interested in your business. He or she, maybe it's a private equity group, maybe it's a strategic buyer, maybe it's a really big deal, maybe it's a really small deal. But letter of intents are definitely negotiable. And this really sets the footing of how the next process is going to go from due diligence to the purchase agreement to even what does your transition phase look like? What are your expectations? What assets are they purchasing? All that can be contained in the purchase agreement. But generally having it in the loi, depending on the deal can be very helpful. So the typical example of what can go wrong in an LOI negotiation. So picture this for a moment. A buyer's interested in your startup. You spend days chatting back and forth via email. You might have ever even met in person, probably not lately with COVID Now your buyer is ready to send you a letter of intent. This is a moment you spend five plus years working towards and you're just super excited. So what can go wrong? So really what you want to do when you get to this point is I highly recommend hiring an attorney, just having someone look over an loi. And after an LOI is going to come some more important legal docs, such as a purchase agreement, potentially a consultant agreement. If you're going to be staying on with a transition period, is there going to be an exclusivity period? Where exclusivity periods, just to give you some context on what those means, that means as a buyer, if I'm going to go into due diligence with you, so that's usually the goal after signing a letter of intent is I'm going into due diligence and I'm going to be going through a number of different things. So it's time consuming. And so I don't want to know that you're shopping my loi, and that's definitely a bargaining chip for you, is I have a lot of interest. So I'm happy to sign this loi, but no exclusivity. I typically do not recommend exclusivity unless you really, really have a good feeling about this potential buyer. But I would recommend no exclusivity. A lot of buyers will just say, hey, we need it. And if they're a great buyer, you know, give it to them. It's not a huge deal. But if the deal falls through, you still want to be able to have conversations with other buyers to make sure that you have someone at the end of this whole acquisition process that's willing to acquire a startup. Now, again, not going to be reading all of these words. These presentations are available on the Microacquire website. So the main thing is really I highly recommend negotiating a timeline. So what this means is you sign an loi, what happens next? Is it like nothing? Like we're just gonna sign it? No, what you want is we're gonna go through an agreed period of due diligence, you're gonna review these documents, we're gonna go over everything that I typically use to run my business and we're going to circle on a close date. So after signing the LOI, you have 60 days, or sometimes 30 days, 90 days, whatever you feel comfortable with with the buyer, that's something to talk through, have a circle closing date. So 60 days after this LOI is signed, we expect to close the deal. Sometimes a deal can close faster, but it just kind of sets that tone like we're going to get this done within a certain period of time. These are the things that we're going to be going over. And that's a big bargaining piece too is we're looking to move quickly. Maybe they want exclusivity period. Okay, well you have a 30 day timeline to go through due diligence, other things discussing the purchase price and how they will pay. So a big part about how to really figure out who is a serious buyer and a non serious buyer is just ask how are they going to fund the acquisition? It's a very appropriate question. You have a lot of buyers reach out to you on Microacquire with just like, hey, I'm interested. And they may not have the funds to finance a multi million dollar acquisition. So just politely asking them like, hey, thanks for your interest, how do you plan on funding this acquisition? That's one of my favorite questions. And then if they respond back, get on a phone call, really focus on building that relationship. But understanding, you know, how are they gonna pay? Is it through seller financing, is it all cash or is it some sort of equity swap? Whatever it may be, you want to close, you want to be on a clear page of how they're going to finance acquisition before you sign a letter of intent. That is absolutely crucial. Minimize exposure on reps and warranties. So this is basically a buyer wants to avoid any nasty surprises. Or misrepresentations or fraud. In this case, you return 100% of the purchase price. This is typically more relevant to stock purchase agreements. So stock purchase agreements are where you're buying the entire company. So using Microacquire Inc. As an example, you would buy Microacquire Inc. And any sort of stock agreement I've given or any customer promise I've made and I've signed, you would be absorbing those. But with asset purchase agreements, and this is why buyers prefer asset purchase agreements way over stock purchase agreements is the acquisition doesn't come with a lot of those liabilities. So definitely discuss those things in terms of, you know, what reps and warranties can we limit how long. So this is huge. So for my first company, business apps, I had a three year period where I was on the hook for anything that I represented incorrectly. For my second company, Altcoin, I had a 12 month period. And then also for business apps I had 100% clause where basically anything that was misrepresented, I was on the hook for that. And for Altcoin I negotiated that down to about 50% of the purchase price. So these are negotiating chips. And understanding the more negotiating chips you have. And again, all you're doing as a seller, when you're speaking with a seller that knows acquisition terminology, acquisition terms, things that a buyer will be kind of surprised, like, wow, how do you know that, okay, this founder is going to sell their company? Because they're really good at giving and taking. Really your goal as a founder is really to bridge a gap on valuation, on terms, on timelines, really just being a pleasure to work with. And the more you know about acquisitions such as, you know, I'm going to sell you the business for a million dollars over the next 12 months. If anything goes wrong, you're only entitled to 50% of the total purchase price back, whatever that may be. And again, gotta say it, definitely recommend hiring proper legal counsel to work through that. In this slide here, decide how much you'll leave behind. So most buyers will expect you to leave the business free and debt free. And so this would mean basically, you know, you don't want to have debt on your books when you're selling your business. So if you have any sort of loans that you've taken out, you want to cover those pretty straightforward. And that's kind of it for this one. This one's pretty simple there. The main ones is basically how you know, how are they going to pay and are you represented by proper legal counsel and what is the timeline? What is the exclusivity period? What sort of assets are they looking to buy? What kind of deal is it going to be? What's the purchase price? How are they going to pay? How can you minimize your reps and warranties? And so if you want to read the fine detail here, just view the comments in the video and we'll be happy to share that to you. So I hope this is helpful. But my main point is that everything is a negotiation in an acquisition. Everything from the letter of intent, even to the purchase agreement as you get further down the line. And so the more you're equipped and the more you're knowledgeable about acquisitions, the higher your chances are of successfully selling your business.