Selling a Small Business
By: Paul Wormley
I spent an hour on the phone today explaining to a small business owner why it is important to a buyer to receive a period of exclusivity when entering into a Letter of Intent with a seller.
This particular seller thought Hadley Capital should “set up escrow” – place a $50,000 deposit to show our serious intent to acquire his business. I explained that rather than a deposit, I would need a 90 day period of exclusivity in order to 1) confirm the seller’s serious intent to close the transaction with Hadley Capital and 2) spend my limited resources (time and money) on working towards closing the transaction.
After Hadley Capital signs a letter of intent with a business owner, we will spend literally hundreds of hours of our time working to close the transaction. As a result, we don’t enter into Letters of Intent unless we plan on closing the acquisition (assuming everything checks out in due diligence). And, since Hadley Capital acquires only two or three small companies each year, we can’t afford to spend hundreds of hours on an acquisition only to have a seller decide he is going to sell the business to another buyer. Thus our need for exclusivity.
We also spend a substantial amount of money when working to close an acquisition (well in excess of this seller’s proposed $50,000 deposit). Hadley Capital hires professional accounting due diligence teams to complete accounting due diligence, we pay for third-party background checks, we may fund independent market analysis or purchase market research, we retain attorneys to draft transaction purchase documents and debt financing documents. These expenses easily exceed $100,000 per acquisition. If an acquisition falls apart because a seller decides to sell the business to another buyer, my partners and I pay these fees out-of-pocket. Again, we need exclusivity.
Any serious small company buyer will require a period of exclusivity when signing a Letter of Intent. The costs associated with closing a transaction are simply too high not to receive exclusivity. If a seller has serious concerns about granting exclusivity to a particular buyer, the seller should conduct a little more due diligence on the buyer before entering into a Letter of Intent.