408 - No Surprises: The Rule That Keeps Deals Alive!

0:00When you are acquiring a business, one of the most important principles you can follow is very, very simple. No surprises.

0:08Bruce Whipple:This is particularly important when you're preparing a letter of intent, commonly referred to as an LOI. The LOI outlines the major terms under which you're proposing to acquire the business. It may address the purchase price, the payment structure, seller financing, the seller's continued involvement, due diligence, exclusivity, and other important conditions. Here is the mistake many inexperienced buyers make. They treat that LOI as the place where they introduce their complete proposal. That is not what the LOI should be. The LOI should primarily document what you and the seller have already discussed and agreed to.

0:54Bruce Whipple:When the seller receives it, their reaction should be, yes, this accurately reflects our conversations. It should not be, what is this? Or worse, what else are they going to surprise me with later? Let me give you an example of that. You may decide that your LOI should include a breakup fee. That's reasonable, and there are reasons why it should. I'm a big fan of breakup fees. A breakup fee would normally apply under very limited circumstances. For instance, perhaps the seller changes their mind after you've hired attorneys and accountants and other professionals to engage in due diligence. Or perhaps the seller agrees to negotiate exclusively with you and then sells the company to someone else and calls you up and essentially says, I'm going to sell it to someone else.

1:47Bruce Whipple:Under those circumstances, I think it's reasonable for the seller to reimburse you for some, if not all, of the expenses you incurred. The problem is not necessarily the breakup fee. That explanation seems reasonable, and essentially what you're saying is we only want you to honor your word. You said you were going to sell it to us, and you can decide you're not going to do that, but there's a price to that, and that's the breakup fee. The problem is introducing it for the first time in the LOI. Imagine that the seller opens a document, sees the breakup fee, and says, we never discussed this. What is this?

2:26Bruce Whipple:You can't explain it perfectly, and you may have a completely reasonable justification for including it, and you very likely do. The damage may still have been done. The seller may begin wondering, what else haven't they told me? What additional conditions will appear during due diligence? and most importantly, can I trust these people, a single surprise can create doubt about the entire transaction. That is why every significant provision in the LOI should be discussed with the seller before the document is delivered. That includes the purchase price, proposed financing, it includes seller financing and what those terms are if that's how you're financing this deal, and I'd encourage you to always work with seller financing if possible.

3:16Bruce Whipple:It includes how long the seller will remain involved. It includes exclusivity. It includes, hopefully, a breakup fee. It includes any significant conditions that could affect the seller's decision. This does not mean every legal sentence needs to be negotiated verbally. Your attorney may include standard protective language. It does mean the major business terms should never come as a surprise. Once those terms have been discussed, you can prepare the LOI. I would also encourage you not to simply email the LOI by itself. Include a carefully written cover letter. The LOI is primarily a deal document.

4:02The cover letter is the selling document. Your cover letter should explain why you and your team are the right buyers for this particular business. Notice that I did not say the cover letter should be a biography about you. The seller does not need three paragraphs about you, your ambitions, your acquisition goals, or why owning the company would be good for your future. The letter needs to focus on what matters to the seller. What outcomes does the seller want? Do they want to protect their employees? Do they want the company's name and reputation preserved? Do they want to remain involved for a period of time?

4:43Do they want more time with their family? Do they want confidence that their customers will continue to be served properly? Your cover letter should demonstrate that you listened. It should say in substance, we understand what matters to you. Here is how our proposal addresses those objectives. Here is why our team is capable of carrying out what we have discussed. The LOI explains the transaction. The cover letter explains why the seller should choose you. Together, they should create confidence, not uncertainty. And before you send an LOI, go through it line by line and ask yourself, have we discussed every important provision in this document?

5:31Then review your cover letter and ask, does this explain why selling to us is in the seller's best interest? If the answer to either question is no, you are not ready to send it. The objective is not merely to submit an offer. The objective is to move the seller closer to confidently choosing you. And confidence is built through preparation, listening, clear communications, and one very important rule, which is how I started this podcast. No surprises. I hope that helps. If you learn that lesson, you will have much more success in negotiating with a seller and making sure that you give them trust to the extent that you can as quickly as possible.

6:21And listening to them, telling them everything, and then having those documents reflected with no surprise is one of the ways to do that. So I hope that helps.