Top Ten Mistakes Sellers Make After Signing the Letter of Intent

You've overcome the first major hurdle and signed the letter of intent to sell your business. Feeling warm and fuzzy, you think you have a done deal, right? Guess again, because you are only half way to the finish line. If you haven't been down this path before, you'll soon realize that there's a whole field of landmines you must navigate in order to avoid killing your deal. Let's take a look at 10 common mistakes that sellers make after signing the letter of intent.


1. Thinking you're chums.

Now is not the time to act as if you and your acquirer are best buds. This is business and although it is best to maintain cordial relations, don't try to get too familiar or personal with the buyer. Acquirers might act overly friendly, but don't be fooled-- they are looking to buy your company on terms that are most favorable to them. Maintain a pleasant, yet professional demeanor all the way through the process until the final papers are signed.

2. Believing you have the upper hand.

If you believe you now have the acquirer where you want them and now have stronger negotiating power, think again. In most cases, right before the LOI is the seller's strongest position, and it is common for the actual purchase agreement to reflect a deal slightly less favorable than the deal reflected in the LOI due to facts uncovered in due diligence on your company. Negotiations from the LOI stage onward tend to be very give and take and both sides need to negotiate in good faith to prevent trust from eroding and the sale slipping away.

3. Giving away too much too quickly.

You've agreed to share information about your company in the due diligence process. Are you sure you are giving them only information they truly require and not important information they don't need to know at this stage of the game? Don't be needlessly generous. Remember that an acquirer that doesn't buy your business can also be a future competitor. Ensure that you have a suitable third party review the documentation before you hand it over in due diligence because it is extremely easy to miss something and inadvertently provide the buyer with information you didn't intend to give.

4. Not being aware that timing is everything.

Timing is important. Set out an agreed upon timeline to conclude the sale. You may have to do this in stages as diligence progresses, but setting a timeline will pave the way to a more constructive sale. Delay tactics are often employed to gain a negotiation advantage, often at the seller's expense.

5. Letting the acquirer drag out due diligence.

It's natural that the acquirer wants to learn everything about the company they're buying. They don't want to uncover any skeletons in the closet after the deal closes. Specialists such as accountants and lawyers are going to be poking into every nook and cranny of your company and it slows the sale down. Set a time frame with the acquirer as to when it will be reasonable to conclude the due diligence examination of your company.

6. Choosing the wrong attorney.

Not all lawyers are equal and some are not necessarily experienced negotiators. Lawyers mostly specialize and they all want your business. Be choosy. You need an attorney who specializes in mergers and acquisitions, not a corporate attorney that happens to "do mergers and acquisitions". The wrong attorney could be the biggest cause of the demise of your deal because they don't know "market" terms in a purchase agreement, they're too rough with the buyer's counsel, or they are overly protective of you. If possible, get a recommendation from your M&A advisor because they usually know the good deal attorneys. Don't be afraid to ask the prospective attorney for references for transactions they completed.

7. Beware the ego trip.

You're only human so it's quite natural to over-inflate the value of your company. Be realistic and more importantly, be flexible. During due diligence, certain issues may arise that will affect the price the buyer is willing to pay. Such adjustments are a normal part of diligence. Your business assets, your particular niche, and even the economy will affect the value of your company in relation to other data points or stories you have heard. Get objective advice from someone that knows the current M&A market.

8. Not knowing whose hand you're shaking.

You naturally expect your acquirer to be looking closely at you, but what do you know about them? You should place your acquirer under the microscope just as they are doing with you. Learn as much about them as possible in relation to the objectives of your sale. Are they financially viable? What is their company philosophy? How have their other deals fared? Be smart and check them out too.

9. Failing to consider what's going to happen after the sale.

You have good people working for you. You've taken a long time to build good working relationships with your suppliers and customers. If you value the people who helped you build your business and have expectations about your legacy, then learn about the acquirer's future plans with your company. Change is both inevitable and often unavoidable, but the ripple effect can be very costly.

10. Letting the cat out of the bag.

You've proudly announced your LOI to everyone. Is your staff going to be smiling? Most likely they'll be spending more time sending out resumes. Your suppliers might be re-thinking the price they charge and loyal customers will be looking elsewhere or bolting to your competitors. Because the sale is a lengthy and risky process, keep the LOI to yourself and only those people who are directly involved. When the timing is right, you'll have all the information you need to properly inform everyone and alleviate the jitters by letting them know where they stand.

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