LOI, IOI, CONTRACT

So before anyone gets their panties in a wad....each has its place. But let me lay out the landscape I am seeing at present.

If you are reading this you know I'm a Business Broker and have been for the better part of two decades. I've sold everything from a pizza parlor, to a mine, to an advertising agency, to a tanning parlor and beyond, from 15 million to 25,000 dollars in size. After 400 of these things I think I have earned the right to weigh in on something...this alphabet soup of documents: LOI,IOI, CONTRACT.

About two weeks ago I brought to market a couple of good businesses that were as we brokers like to say "IN THE BOX". In the box means the following:

1. Properly Priced within the multiples the comps show
2. Clean Books and Records (i.e. taxes that reflect reality)
3. SBA qualified

Now for you laymen and women out there you would think this would be a pretty low bar to hurdle in the market. It is not. Less than 20% of businesses that go to market start off in the box.

The sellers in both these cases were experienced, former clients, and understood the marketplace and how we do what we do. Hence they went to market "In The Box".

The consequence on both was that there were multiple offers on both at or above list price, resulting in a bidding war. Now that is not the point of this article.

In 14 of the 16 offers presented the buyers submitted Letters of Intent (LOI) (by the way I asked them not to and sent them the standard APA used in the market). Now for those of you who do not know what that is click here. I instructed each of the buyers that the LOI would be submitted as would the offers but since it was not a binding document it would be looked upon as such compared to offers submitted on a contract.

Now some of you are like what's the big deal....well here is the monkey. Letters of intent are just that ...a document stating you intend to do something. They are basic in form and lay out the general terms of a deal. They are perfectly appropriate for complex M&A transactions but at the main street level its problematic. Here is why:

• Most main street deals are simple in nature and form. In the Florida market, the Business Brokers of Florida have standard contracts that can be amended and have clauses affording amendment. The LOI leads to a contract being created (which implies an attorney and subsequently opposing party should get counsel to review said document resulting in fees)
• The simple fact is that small business owners view the costs of transactions as troublesome. Broker, Closing, and Legal Fees can eat up the profits (not to mention the taxes), and as such a smart buyer should leverage existing documents that do the job and afford the parties due protections under the law. Adding extra fees to a seller is a discriminator plain and simple and indicates that you as a buyer do not understand the context of the seller's motivations and concerns

Now, Back to the story. We presented all 16 offers to the sellers. The sellers who were both licensed realtors looked at the LOI's and said "why are they doing this for something so simple..did you explain to them a standard contract is available?" Wham! The door was shut on the parties that presented LOI. You see the sellers drew conclusions about how the buyer would behave in the transaction by appropriateness of the form they presented.

Letters of intent (and now the new one IOI (indication of interest) ) is great for the buyer (always has a no shop clause and exclusivity) but is not great for the seller at the MAIN STREET LEVEL.

Buyers need to spend some time away from the computer screen and their MBA coursework and listen to the muses of the marketplace. Let me further opine: I was on an intro call with a buyer on one of these deals and the buyer (the junior guy in a PE firm) was asking PE-level questions and laid out the structure he wanted (a earn-out) for the deal. Now I generally keep quiet on calls but I wanted to save everyone some time. I interrupted and politely told the gentlemen that an earn-out was not going to work, that the amount of interest was so great he needed to present his best offer, and he politely told me to go pound sand (not a smart move by the way given Transworlds Market Share). When the call ended the seller said to me and I will paraphrase "well he doesn't get it does he?".

In closing, be appropriate, use economy of force for the task at hand and realize Mr. & Mrs. Buyer that in many cases you are competing with others. You are not the only game in town. Be humble, be polite, and be coachable.

Tampa Business Broker Michael Shea is a Partner at Transworld Business Advisors the worlds largest business brokerage. With over 400 transactions, 1 Billion in volume sold, and 20 years of brokerage he sometimes shares some observations here. He may be reached at [email protected] or call him at 3212870349.