You Received an Offer to Buy Your Business—Seek Counsel Before Signing

Whether you are actively preparing to sell your business or unexpectedly receive an offer too good to ignore, an offer from a prospective buyer is a significant step in the transaction process. An offer is usually put in writing through what is a called a “Letter of Intent”, or “LOI”, and is an agreement where the buyer and seller agree to the key terms of the potential sale. These key terms generally include the purchase price, proposed closing date, list of assets to be sold, and more. The LOI can also address more complex terms such as a seller’s non-compete, earnouts, holdbacks, and post-closing commitments.

Though typically most of the provisions in an LOI are considered “non-binding”, meaning that neither the buyer nor seller can strictly enforce each term as written, an LOI still sets the framework of the entire deal. It becomes a reference during preparation of initial drafts of the definitive transaction agreements, as well as in the negotiations and revisions to follow.

Non-competes are standard for a seller and are often a section included in an LOI. However, with a non-compete it is important to carefully review how the buyer is defining your business and what services that definition includes, as it directly shapes what will be considered a “competitive business” after closing. These definitions can ultimately affect the seller’s employment options following closing. If the initial offer includes an earnout, there are additional questions that may arise regarding the continued employment of the owner and how final calculations will be determined.

When a seller signs an LOI prior to involving counsel, then unfortunately, this can often lead to the seller moving forward with the transaction under unfavorable terms or the seller may spend additional time trying to push for differing terms after initial drafts of the definitive agreements have been put together. A Letter of Intent may be non-binding, but it will always be used as a first line of defense to argue that a term was already agreed between the parties.

There are additional factors to consider with each term and points that can be negotiated upfront to avoid the discussions further into the transaction. Because of this, it is always best to discuss the offer with a corporate attorney and have them review the proposed LOI before you sign the offer. We can assist you beginning with the first offer to ensure that as the seller you are comfortable and satisfied with terms of the deal before entering the next step of the transaction process.

If you have received an LOI or are considering selling your business, please reach out to Tara Bailey from Strauss Troy's Corporate & Business Department at tkbailey@strausstroy.com or 513-629-9484.