The Letter of Intent (LOI) may be the single most important document created during the merger and acquisition process. This document outlines the mutually-agreed upon key business terms between the buyers and sellers. Although nonbinding in nature, sellers should always consider the following before signing the LOI:

  • Provide the most accurate information and data during the preliminary due diligence process
  • Thoroughly define the terms of the deal
  • Disclose everything, including weaknesses. No surprises!

The LOI becomes the basis for all agreements and documents that legally bind a business sale. Therefore, sellers must use their leverage to establish a purchase price, structure financing, define terms, employment arrangements, and closing contingencies before signing the LOI and granting exclusivity to a single buyer. Failure to provide the necessary content to an LOI could be disastrous, and underscores the importance of having a trusted M&A Advisor by your side, walking you through the various stages of constructing the most advantageous Letter of Intent.


In conjunction with the future earnings of a business, merger and acquisition (M&A) deals require the delivery of the ordinary and necessary balance sheet of the business to the buyer. The balance sheet should be adequate for the continued operation of the business and exclude cash and long-term debt (the “Enterprise Value”). Due to the variable nature of the balance sheet, sensible targets for cash (if any), net working capital and net assets are customary.

Net working capital, or current assets minus current liabilities, tends to be the most ambiguous and disputed balance sheet target. With significant fluctuations in cash, receivables and payables from negotiation to close and varying definitions of the term, net working capital targets may require further negotiation between parties. Approaches to a negotiated target may include:

  • Average working capital for a specified period around the time of negotiations
  • Average working capital for a specified period as a percentage of quarterly or monthly sales
  • Average working capital from comparable companies in the industry

An experienced M&A Advisor will identify and resolve potential problematic issues early, especially before the signing of the Letter of Intent.


For many smaller middle market companies (less than $50 million in revenues), Private Equity Groups (PEGs) are “targeted” buyers that seek to acquire ongoing, profitable businesses with realistic growth potential. PEGs provide access to capital, offer insights and expertise, assist with improving market share and operating efficiencies, and have a clear exiting path.

Often times, PEGs will pay substantially all cash for an acquired company; however, the investment philosophies and transaction structure may take on many different forms depending on the sellers’ objectives.  These may include:

  • Family Succession – allows family business to stay in the family; ownership acquired from the senior generation, achieving liquidity; active family members control with a financial partner.
  • Growth Capital – provides access to non-recourse capital, diversifying risk.
  • Management Buyout – provides key employees with a cash partner for ownership.
  • Outright Sale – provides for the seller to transition into retirement.
  • Recapitalization – owner sells a portion of the company, retains an equity interest and participates in the upside potential of the company.
  • Strategic Buyout – maximizes sell price; cross-selling to PEG’s portfolio companies with same customer base.

The strategy and focus of PEGs varies widely; sellers’ goals and benchmarks must be stated upfront for a winning acquisition.



Know Your Key Performance Indicators!

If you are not keeping score, you aren’t going to make it. You must know your numbers! You can start with your monthly income statement and balance sheet. You must identify the Key Performance Indicators (KPI) of your business. What are the trends of your KPIs; how do the current month’s KPIs compare with the monthly current year to date numbers and with the same period last year? Do the trends show growth, decline or stagnation? How do you compare to similar sized companies in your industry? Possible Key Performance Indicators of your company may be:

  1. Sales Growth
  2. Gross Profit Margin Percentage
  3. Net Income Percentage
  4. Debt to Equity Ratio

KPIs are not always financial statement measures that are predictive of results but may be predictors of the future profitability of your business. You must answer the question: if my business is going to change, what would be the first indication; learning to anticipate instead of reacting. These KPIs will include:

  1. Number of days’ order backlog
  2. New bookings
  3. Dollar volume of quotes/bids
  4. New customers

Be More Cost Effective!

Know exactly how you make money; identify priorities, review budgets, right size and cut non-essential costs. Fine tune the familiar and redefine the processes. Remove all cash outlays that do not generate revenue. Accountability from the bottom-up; assess employees. Reduce all non-employee expenses by 10 to 20%. Use incentives to motivate, encourage behavior and retain employees. New equipment and other capital outlays must be justified; consider postponing new capital investments.

Go For Revenue Opportunities!

Listen to your employees, existing and potential customers for opportunities. Seek out the best of advisors; be flexible and ready to change. Explore all revenue opportunities; especially non-expensive marketing activities: blogging, podcasting, refresh web-site, vertical and horizontal expansion of sales. Be proactive; invest in training your sales force!

Manage Cash!

Cash is King! Manage your transactions for greater liquidity; position the company to operate from a position of strength. Expect higher taxes, slower accounts receivable payments and tightening credit; reduce inventories and collect receivables as aggressively as possible. Communicate to your banker regularly; know what is working and acceptable; ask to be introduced “up”. Now is the time to establish second relationships with other banks.

You Must Change Now!

The future is unpredictable; being prepared is the best way to “win the game”! Use assessment tools; benchmark goals; set times for achievements (deadlines)! Challenge your current thinking, maintain a great attitude and take action. Remember the things that brought you success in the past are not necessarily going to carry you forward.


A vision for Growth Strategy is a practical approach to achieving top-line revenue growth and bottom-line profit results. Company growth strategies are critically important whether the seller is a start-up business or has been in business for years. In today’s economic recovery many CEOs and business owners have become strategic buyers turning to acquisitions in order to accelerate their growth.

For sellers, the Growth Vision for their company provides one or more of the important acquisition/merger criteria that will enhance the value/selling price of their business. A well defined and supported vision of a growth strategy for the Seller of a business will:

  • Increase the value and sales price of the seller’s business.
  • Support the buyer’s financing or required or required return on investment.
  • Increase the number and quality of potential buyers.
  • Provide a clear vision and roadmap of future direction.
  • Increase the expectations from post-transaction operations.
  • Minimize future risk and uncertainties
  • Support the buyer’s long-term growth strategy

Make your company a highly-valued, strategic acquisition and realize a much greater sales price rather than a “rule of thumb” financial multiple by developing a Growth Vision for your company.


The uses of business valuations are almost unlimited: buy/sell agreements, fairness opinions, purchase price allocations, estate planning, gift taxes, charitable contributions, shareholder transactions, Employee Stock Option Plans (ESOPs), solvency and insolvency opinions, collateral valuations, litigation support, etc.

When selling one’s business, clarifying the seller’s goals and measuring those goals’ financial needs with the proceeds from selling the business may be determined by a valuation of the business. The impartial sell-side valuation may determine the need for the owner’s further preparation of the company for sale or give the “green light” to proceed with the sale of the company.

The business buyer in most acquisitions attempts to acquire companies at a price no greater than its “fair market value.” The buy-side valuation of a “target” company may result in a quick decision to proceed with the acquisition or move to a new “target.”

The valuation analyst uses two types of engagements, a Valuation or a Calculation, to estimate a company’s value. The analysts may render his conclusions in a verbal or written report; a valuation report communicates results in a conclusion of value; and, a calculation report communicates results in a calculation of value.


Maximizing the sales price of a business involves focusing on the “value drivers” of the industry. Value drivers are the set of key factors that reduce financial risk, improve financial returns and create value for the company. These aspects are used by buyers, investors and financial lenders to determine the value of a company. Value drivers are not unique to maximizing the sales price of companies but are sound business practices.

Value drivers for all industries include: a solid diversified customer base, a strong management team, operating systems that improve the sustainability of cash flows, an achievable growth strategy, a facility appearance consistent with the sales price and effective financial controls.

Industry specific value drivers include: extent of referral network, certifications, competition, specialized processes, geography served, affiliations, environmental issues, growth opportunities, seasonality, supplier relationships, equipment quality, technological expertise and backlog of contracts.

The sale of one’s business may be the most significant financial transaction of an owner’s life. Early planning for effectively maximizing the sales price of a business is the first step in a successful exit plan.


It has long been recognized in the Merger & Acquisition market that “having only one buyer is the same as having no buyers.” For the seller of a business, having multiple buyers is an absolute requirement to maximize the sales value of an owner’s business. But just how does the M&A Professional bring multiple buyers to a sales transaction?

The M&A Specialist will develop a Confidential Information Memorandum (CIM) designed to engender competition among potential buyers. The CIM reflects sales and marketing strategies to efficiently, effectively and confidentially attract “Qualified Buyers” from two major groups:

  • Financial Buyers – typically identified as investors interested in the return they can achieve by buying a business.
  • Strategic Buyer – traditionally in the same business or industry as the seller.

These groups may include:

  • Private Equity Firms, who generally raise capital, invest with various strategies in operating companies and attempt to maximize returns in accordance with various criteria.
  • Operating Companies, who are in the same business or industry seeking new markets, products and services.
  • Individuals with the resources to invest and are willing to examine different types of businesses or industries.

The distinctions between financial and strategic buyers may be numerous and significant; however, persistence may be the most important quality your professional possesses to develop multiple “Qualified Buyers” for the sale of your company.


Rules of Thumb are used every day to help business owners place a sales value on their business. These “rules” are quick, simple and easy to apply; however, they are only the beginning in the process of determining a business value.

Many of these rules belong in one of two categories:

  • A multiple of gross revenues (sales)
  • A multiple of earnings (net income, cash flow, EBITDA)

The value derived from these “rules” is the value of the operating assets of the business plus goodwill. The price does not include cash, accounts receivable, work in process, prepaid expenses and real estate; these will be retained by the seller. It also assumes that the business will be free and clear of all debt and accounts payable; these will be paid by the seller.

Business Valuation Resources has identified “rules” multiples of gross revenues for major industry groups in recent years:

Industry                     2008           2009          2010

Construction              0.39            0.40           0.35

Manufacturing           0.53            0.61           0.52

Transportation           0.69            0.43           0.55

Wholesale Trade       0.46            0.45           0.52

Retail Trade               0.36            0.33           0.34

Services                     0.56            0.53           0.56

These “rules” are very useful tools; however, they are often misunderstood and misapplied.


In acquisitions, a Letter of Intent, or LOI, is a document that outlines the key business terms the buyer and seller agree to, which later become the basis for all agreements and documents that legally bind a business sale.

Common clauses in the LOI should include who the buyer and seller are, purchase price, structure of the deal, payment terms, owner financing, allocation of purchase price, seller’s continuing role, the extent and timing of due diligence, determination and life of escrows, length of the exclusionary period, closing costs responsibility, retention of key employees, terms of a non-compete and closing date.

The seller normally prefers as much detail as possible in the LOI and a short exclusionary period. The buyer, however, will want to wait until after due diligence to lock in terms and conditions, and will want the seller’s business off the market as long as possible. The seller has maximum leverage over the buyer just prior to signing the LOI. Immediately after the LOI is signed, negotiating leverage shifts to the buyer.

The LOI is a negotiated document and will involve time and expense for both parties. The introductory handshakes of buyer and seller are stressed under the tough negotiations of drafting an LOI.