One of the first and most critical steps in selling or acquiring a company is the Letter of Intent. It is one of the first opportunities for mistakes to be made. Let’s take a look at why LOIs are so critical to your success in completing a transaction.
What is an LOI?
Almost exclusively used as the first step in the process of major business transactions, a letter of intent (LOI) is a document declaring the preliminary commitment of one party to do business with another. Presented in a letter format, it outlines the chief terms of a prospective deal. LOIs can be iterative in nature, where one party may present an LOI to buy a business, and then the seller may counter with a tweaked version of that LOI or they may draft a new document altogether. Ideally this process saves negotiation time in the long run, so that when both parties come together to formalize a deal, the broad strokes of the deal will already be hammered out.
What may be included in an LOI?
While not an exhaustive list, here are some elements that are often addressed in an LOI:
– Type of transaction — asset deal or stock deal?
– A list of the assets to be sold in the transaction
– The purchase price for the business and all its stated assets
– Exclusivity period parameters
– Expected length of time for due-diligence to occur
– Definitions of important terms that might be used during the transaction
– A target date for the execution of the purchase agreement
– Identification of transactions jurisdiction and governing entities
– “No-solicitation” provisions, which forbid one party from poaching the other party’s employees
It is important to reiterate that an LOI signals the beginning of a formal business transaction. As such, it is critical that sellers understand what they are signing and consult with their professional advisors before executing a LOI. Yes, even before sending a “quick text” to confirm receipt – any and all written communication can affect the terms of your future agreement.
Is an LOI legally binding?
It depends, which is why it is critically important to seek legal advice as soon as an LOI is received. Some LOIs are not binding at all. Others may only create limited obligations like maintaining confidentiality and ensuring each party bears their own expenses. In contrast, some LOIs may qualify as an enforceable contract with or without additional negotiation, possibly even serving as the contract if you don’t sign the final agreement.
Letters of Intent are an exciting part of the M&A process. They also herald a significant event, the sale of a business, so seeking experienced advice is critical. We work with privately held business owners across the United States who are interested in selling or recapitalizing their companies. Our team has over 100 years of combined experience in these transactions. Please contact us for a confidential discussion about how we can help you.
When an owner starts to think about selling their company, they don’t dream about being on the market for years or about knocking on doors for the right buyer. Instead, we all dream about the day when the perfect buyer shows up in our lobby begging for a meeting.
For most companies, the reality is somewhere in between the two. But leaders who do the right planning up front set themselves up for greater success and increase their chances of attracting the right investors to their company. When the right buyer looks at your company, you want them to see something enticing right from their first glance. Creating a great first impression takes a little prep work.
Think like a start-up: Clearly define and communicate your story
First, try to think of your company like a start-up. Many start-ups raise money before they have established sales. How? By selling their story. Your company has a brand and story as well. Now is the time to define it, before you meet with any potential buyers. Is your story inspiring? Is there potential for growth? Does it sound like a story that would intrigue your ideal buyer?
Once you have a compelling story, the next step is to clearly communicate it across all of your marketing channels. Buyers are busy and they look at hundreds of companies. Assume that they will make a snap judgement about your company after only a quick first impression. Utilize your website, social media accounts, and marketing collateral to share your brand story. No matter how your ideal buyer finds your company, you want them to encounter the same consistent messaging to capture their interest.
Prepare like a pro: Develop your prospectus before you have an interested investor
Second, pretend you already have an interested investor on the phone and prepare your prospectus now. A prospectus is a detailed 15- to 40-page document that outlines what your business does, how it makes money, and how it operates. It also includes data about market trends, growth opportunities, and frequently asked questions about the company. Having a completed prospectus ready to go means you won’t have to panic or scramble when investors knock on your door, avoiding costly delays or loss of interest.
Do due diligence now: Understand your business’s strengths and weaknesses
Third, review everything a potential investor would want to see before they ask to see it. This should include (but is not limited to):
– historical profit and loss data
– historical balance sheet
– summary of your financials (tax returns, bank statements, and merchant statements)
– customer lists
– a staff list
– suppliers’ names and information
Buyers may ask for interviews with staff, clients, and subcontractors. They may ask to see the contracts suppliers and staff have signed, as well as contracts for any business systems and vendors, etc. Being organized and prepared before due diligence starts means two things. First, you’ll have identified your strengths and weaknesses in advance, and have the opportunity to correct blemishes before they become visible to a potential investor. Second, your prepared team will be ready to respond to a potential buyer much faster than an unprepared team, giving you an advantage.
Once you have completed your prep work, potential investors will be able to quickly look at your organization and understand if it may fit their goals. Your business will be organized, interested, and ready to sell when the right opportunity comes along. Feeling overwhelmed? We can help. Our team helps Middle Market companies strategically assess their options and prepare for big transitions. Please contact us for a confidential discussion about how we can help you.
While Fortune 500 companies and sexy startups often get more media attention, the middle market is a powerful force, made up of nearly 200,000+ businesses, or three percent of all U.S companies and one third of all U.S. jobs. Middle market companies typically have annual revenues of $10MM – $1B and may be private and public, family owned, and sole proprietorships, geographically diverse, and span almost all industries. Given their size and variety of ownership, these businesses often endure a lot of change over time.
According to the National Center for the Middle Market, age and retirement are among the top reasons for leadership changes or major transitions in middle market companies. Larger organizations are more likely to make changes to spur growth and competitiveness. Sole proprietors and partnerships are more motivated to scale, while publicly held companies are more motivated to create change at the top. The most successful companies with the most longevity have figured out how to navigate these inevitable transitions successfully.
3 M&A Trends in the Middle Market
There are several broad trends that we’re observing in M&A activity within the middle market:
1. Mergers to gain innovation – As generations change, so do consumer needs. Making the right investment in innovation can help a company remain nimble as disruptors continue to enter the market. A great example is Coca-Cola’s $5.1 billion acquisition of British coffee chain Costa Coffee. By purchasing rather than creating innovation from scratch, Coca-Cola not only now has a strong coffee platform in Europe, but also acquired access to Costa’s coffee sourcing, vending and distribution expertise. A particularly smart move as consumers shift away from sugary drinks.
2. Mergers to gain a competitive edge – Amazon’s purchase of Whole Foods was understandably big news. What is interesting to watch is how other companies have reacted to stay competitive. Shortly after the Amazon purchase, Sprouts Farmers Market, the supermarket chain (a direct competitor to Whole Foods) announced a partnership with grocery delivery technology company Instacart, initially sending its stock soaring 5 percent. Smart companies are making purchases to gain innovation to stay on par with or ahead of their top competitors.
3. Alternatives for growth, outside of traditional mergers – While there are still plenty of auction-based deals, private equity enables a company to partner with a firm that maybe better aligned on strategic objectives. Forming the right partnership with a private investor or firm, means not only capital to expand a business, but also valuable expertise to redirect strategy. For example, Roark Capital is a private equity firm with a focus on fast-casual dining, perhaps best known for purchasing and turning around Arby’s in 2011. More recently, Roark acquired Buffalo Wild Wings for $2.9 billion. With its vast restaurant expertise, critical insight, and keen understanding of fast casual consumers, Roark is set to help Buffalo Wild Wings revamp its image to appeal to a new generation of diners.
Although the examples above represent the higher end of the Middle Market we’re seeing these same trends play out at the lower end of the Middle Market ($5M-$75M in revenue) with clients taking advantage of current market opportunities.
We help Middle Market companies strategically assess their options and prepare for big transitions. Please contact us for a confidential discussion
In recent news, outlets are reporting that there may only be one interest rate hike in 2019, in part due to the partial shutdown of the U.S. government, which has left hundreds of thousands of federal employees without a paycheck.
How do interest rate changes affect small to midsize business owners?
If you’re a business owner, aspire to be one, or work with business owners regularly, then you must understand the major ways that interest rate changes affect how companies operate.
1. High Interest Rates Make it Harder for Business Owners to Get Loans
Most small to midsize businesses have outstanding loans, and when interest rates rise, it is more expensive to pay them off. Further affecting future growth, raising interest rates make it more difficult to take out new short-term loans to help pay for unexpected expenses or to expand when necessary.
2. High Interest Rates Lower Consumer Confidence
When interest rates rise, consumers will have to pay more to lenders to repay their loans. This mean less disposable income left in their bank accounts to spend on products and services. Business owners providing luxury items may be hit harder than a company supplying basic staples.
What can business owners do now to prepare for the potential of rising rates?
1. Focus on Building Your Business Credit History
Having a strong business credit history means options: you can choose the lenders, creditors, and vendors your business works with. This allows for greater control over your business’ cash flow.
2. Review Future Growth Projections
Consider future rates when planning future growth projections, particularly those that will rely on a project funded by a loan. Even a 1% different in interest rates can make a significant difference in the price of the loan, and therefore the value of the project.
3. Review Current Terms of Your Outstanding Loans
Take time to review all of your current business loans now. Understand which loans could be affected by a rise in interest rates (due to a variable rate, for example).
If you need any assistance thinking through what interest rate increases mean for your business, don’t hesitate to reach out to us.
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There is a new normal in private equity markets. Limited Partner co-investing has grown past the point of a trend to an established method for LPs to actively invest.
LP allocations into co-investments have grown every year since 2012. In 2016, the total value of LP transactions was $103 billion by early December, which is more than any year since 2007. And this increase isn’t secluded to huge funds; we are seeing it in the middle market as well.
So, what’s driving this trend?
First, General Partners Increasingly Want the Capital That Co-Investors Bring
The thirst for capital is illustrated by a recent survey by ValueWalk, which showed that 87 percent of fund managers are offering co-investment opportunities.
A common reason PE firms do this is to take advantage of attractive investment opportunities that are outside the scope of their traditional fund. Because traditional PE funds are rigorously structured, it is difficult to jump on a new opportunity or make decisions on a short timeline. Co-investing allows both GPs and LPs to get around those restrictions.
In the middle market, co-investments are also often offered when transactions fail to close due to a lack of capital provided by an investor. By bringing in more capital from a co-investor, the GP is able to complete the transaction.
Second, Co-Investing Is Very Attractive to LPs
It used to be that co-investments were primarily used when private equity firms wanted to take on a particularly risky investment and having a pool of independent investors participating outside of the normal fund was a good way to disperse the risk. While that still happens, it’s not the norm anymore. Several factors have made co-investments much more attractive to LPs.
1. Co-investors are seeing better fund performance.
The most significant factor causing the persistent increase in co-investments is the number of LPs who are seeing great performance from their investments. According to Valuewalk, a surprising 80 percent of LPs report better performance than what they see in traditional PE funds.
2. The relationship between GPs and LPs has changed.
As the performance and attractiveness of the private market has gotten better year-after-year, the number of new GPs entering the market has increased. Even though LPs have been increasing the amount of capital they are infusing into the co-investment market, they are still undershooting their target allocations. Therefore, competition among GPs for LP funds has increased.
This has led to a particularly beneficial negotiating position for LPs. Co-investors are often able to eliminate the 2-and-20 fee structure that was almost always used in the past and is still used for traditional PE funds. In fact, 49 percent of GPs didn’t charge any management fees for co-investments. Also, LPs can have more influence in the operations of their co-investments than possible in a normal fund through partnership agreements.
3. Private markets are becoming more attractive than public markets.
The public markets are on an impressive nine-year rise. While the economy remains strong, it’s not irrational to be wary of a bull market that runs for this long. Consequently, some LPs are relying more heavily on private markets to leverage any potential correction in the public markets they think might be on the horizon. Co-investing is often the way many LPs choose to do this.
Expertise is Required
While co-investing is on the rise, that doesn’t mean that it has become easier to do for the average private market investor.
The two primary methods for co-investing are direct and side-car. A direct co-investment is when an LP invests in a pre-established opportunity offered by a GP. This makes the LP a stakeholder in the fund who can take a very active role its operations. A side-car is when the co-investment itself is set up as an LLC or LP, so the GP remains in control of the fund. The LP can negotiate things like entry and exit rights prior to making the investment, but it gives full operational discretion to the GP.
Successfully making a direct co-investment requires a lot of expertise in managing a private investment portfolio. Successfully making a side-car co-investment requires a very good relationship with the GP you’ll be working with.