One of the first steps in the sale of your company will be entering into a Letter of Intent. In order to avoid drafting lengthy documents and spending time and money on attorneys unnecessarily, you should be certain that the primary terms of the sale are documented in a letter of intent. It is during the negotiation of the letter of intent that your company will have the most negotiating power. In addition, at this stage, it is critical to involve a tax consultant to be sure the transaction is structured in the most tax-efficient manner. Even though most of the terms of the letter of intent are non-binding, they will serve as a guide to the transaction and will be referred to often by the parties.
One of the binding terms in the letter of intent is likely to be a “deal protection provision,” which may be a “no shop,” a “window shop” or a “go shop.” These provisions protect an acquirer who, because it is spending substantial time and money evaluating and negotiating the acquisition, does not want the seller to seek a different purchaser following the signing of the letter of intent. The most common deal protection provision is a “no shop.” This provision precludes the selling company from talking to other prospective purchasers unless the board must do so in order to satisfy its fiduciary obligations to shareholders. A “go-shop” allows a selling company to seek a buyer at a higher price for a designated period of time after the letter of intent or purchase agreement is signed. This provision is useful when a buyer wants to enter into a letter of intent or purchase agreement quickly before the seller has had an adequate opportunity to seek the best price for the company. A “window shop” is not used as often as a “no shop” or a “go shop.” It allows a selling company to talk to prospective buyers that contact it but not to actively seek buyers.
Don’t Focus Solely on Price. Once you decide to sell your company, you have a fiduciary duty to your shareholders to get the best price possible and you may be subject to lawsuits from other shareholders who claim you could have gotten a higher price. However, the price stated by the buyer in the letter of intent may not be the price you actually receive for your company. It is important to assess how the purchase price will be paid. If it is to be paid in stock, the stock may not be transferable. Even if you acquire stock in a public company, you may not be able to sell the stock until you have met certain holding periods. By the time you are able to sell the stock, it may have declined in value. In addition, the purchase price may include an “earn-out” – a deferred payment based on a designated financial metric such as EBITDA or net income in future years. These are often the cause for disputes when the time comes to calculate the earn-out. They are also tricky because, once your company is sold, you lose control over how it is operated and the earn-out may be less than it would have been if you were in charge. Finally, a portion of the purchase price might be subject to a holdback or an escrow – an amount of money available to a purchaser if there is a breach in the representations and warranties or in the covenants. Thus, it is important to look at the stated components of the purchase price and assess how realistic it is that you will actually receive the full amount.