Maybe the best place to start defining a MOU (Memo of Understanding) or LOI (Letter of Intent) is by explaining what it is not.  It is not a contract and thus legally binding but more like an outline to a potential offer. It’s like getting a coffee with someone your interested in dating.  Is that coffee a date or just a meeting will really depend upon where it goes from there.  For me, it’s more like my personal budget, an outline defining what I think I will earn and then spend but really it’s only as good as the paper it’s written on. 

Don’t get me wrong, the LOI is very important and should outline the demands/wishes of both the seller and buyer.  It should spell out the deal breakers and potential trouble spots in the negotiations like price, terms, timing, contingencies, agreements and such.  If you want to compare it to the dating analogy then the buyer is explaining the rules to the offer.   You can Google LOI or MOU and there are many sample documents of what should be included in it.  The real point is that it should detail out what the buyer is willing to pay, how it will be financed and what the terms of the offer will be.

My suggestion is to be honest and frank when dealing in the terms of the LOI and negotiate hard.  Don’t wait until the end and throw out something you have been withholding that blows the deal.  It is much easier negotiate early in the discussions then later in the transactional phase.  Another key point is to make sure that you understand everything written in this agreement.  I mean everything and ask questions.  Understand the financial, legal, tax and personal ramifications of each term and have it explained until you get it.  Remember that your advisors often don’t get paid unless they close the deal so they would rather know now if something is wrong.

To be honest with you, what I have found really happens is a seller will often sign the LOI after understanding the terms but then later change their mind.  Many times a seller changes their mind because for some reason they start thinking they could get a better deal or better terms to the deal.  Let me make this very, very clear, at EVERY closing (including my own) the buyer will think they paid too much and the seller will think they sold it for too little.  People are going to ask how much you sold it for or some broker is going to tell you they could of got more and seller’s remorse and regret might creep in.  Don’t let it happen, it’s normal, but move on.

Overall the key to understanding an LOI is that it is not a contract but an outline.  It’s meant to document the terms of the deal and you should make sure you understand everything in it.  Selling a business is a process and a being an entrepreneur is a verb.  Your business is alive and every changing so understand that the more you learn about the selling process then the better chance you have of making it a successful experience. 

This entry was posted on Tuesday, November 17th, 2009 at 5:21 pm and is filed under Strategic Advisors, Selling a Small Business, Sell Your Business, Exit Stories, Emotional Selling, Exit and Answers, Buy a Business. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.