Specific details during the LOI negotiation

May 30, 2018

by a searcher from University of New Hampshire in 101 Rocky Pond Rd, Hollis, NH 03049, USA

Still trying to get the LOI signed and I've been asked to provide a "Breakdown of WC, inventory, salary & perks for the owner, terms of earn out, non-compete after termination, etc", I have more than 15 years of Corp Dev experience buying (and selling) company's both large and small, single owner, VC funded and public and I can definitely say I have never been asked to provide this much detail this early in the discussion. I've offered a competitive price with both a seller note and an earn out plus equity and board seat. Now the guy want's a salary and perks!! Doesn't her realize the company still has to make money??!!

Anybody run into this before (the detail request not so much the greed one). If so how did you handle it?

Thanks -Tim

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Reply by a searcher
from Harvard University in Minneapolis, MN, USA

Tim - I didn't run into this before issuing the first LOI with my current deal but I wish I had.... I was too vague with the details around the seller note and net working capital adjustment and it caused us to have to renegotiate the entire LOI about a month later, which in turn has delayed the closing. Luckily, we were able to structure an even better deal for both parties but there was definitely some heartburn getting to the new LOI. I don't think there's any harm to having a discussion with the seller about the specifics on these topics before coming back to him with the expanded LOI. He probably views all of these things as a value transfer between buyer and seller and wants to value the entire proposal, including the headline price. Some things your seller might want detail on (from my experience): - Seller note: are you going to personally guarantee it? If not, does he have any recourse if the company goes bankrupt? - Earn-out: how is it calculated? If payment is earned, how quickly is it paid? Who pays it (you, the business, out of escrow, etc)? - NWC adjustment: what is the NWC target? What is that based on (i.e. average NWC over prior 12 months, the NWC from one year prior to close, something else)? If an adjustment payment is required to either buyer or seller, when is that paid? - Owner employment/consulting post-closing: how long? how much is he paid? does he get employment benefits from company or is he on his own? Best of luck getting this negotiated and signed. ~Pat

Reply by a searcher
from New York University

Hi Tim, thank you for sharing. I've run into the NWC issue with a prospective seller recently, interestingly with similar circumstances that your seller is facing (boomer looking to slow down,). In addition, there was some push back on the earn-out vs. seller note. We haven't progressed to an LOI, however, I wanted to get ahead of some of these details. The NWC conversation was a complete blindspot for him. Not sure if you're working with a broker or are direct sourcing, but I was able to get the broker to agree to push this issue with the seller - he wasn't going to let a deal fall apart over NWC terms. Net, if you are working with a broker, you might want to see if they can mitigate some of these issues. Happy top connect offline if you'd like. Thanks again, Scott

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