Mark Pestronk
Q: In a recent column, you started to explain the steps in a typical travel agency acquisition and covered what would be typical selling price and payment terms. Once the prospective buyer and seller have informally agreed on these points, what's next in a typical deal?
A: I am glad you used the word "typical" in your question because the steps that I see as typical are not necessarily what every seller will go through. Many successful acquisitions deviate at least in some way from what I would call the typical path.
The next step is a choice: The parties may either agree on a letter of intent (LOI) or skip the LOI and go right to an agreement. It is usually the buyer that makes the choice, depending on whether the buyer feels the terms are sufficiently clear that no further clarification is needed.
As I have implied, the main purpose of an LOI is to spell out each party's expectations with respect to the business terms of the proposed deal, not only the price and payment terms but also the role of the selling owner, staff retention, the proposed acquisition date and any other terms that a party wants to clarify at any early stage. The buyer typically drafts the LOI.
Another purpose of the LOI is to give the parties the opportunity to demonstrate their commitment to the acquisition while they wait for one side's attorney to draft the definitive agreement, which can take anywhere from one day to two months, depending on the experience and availability of the drafting party's lawyer. An LOI can be done over a weekend with or without an attorney.
The LOI needs to state whether it is binding, nonbinding or partly binding and partly not binding. Otherwise, the party that wants it to be binding (against the wishes of the other party) might get a court to agree that it is binding. Typically, the price and payment terms are nonbinding (i.e., subject to change between now and when the binding agreement is signed), but the confidentiality, exclusivity and related legal terms are expressly stated as binding.
The other option is for the parties to skip the LOI and agree not to sign anything until they sign the definitive agreement. Buyers often prefer this route when they know that their lawyers can draft the definitive agreement quickly and efficiently.
Negotiation of the definitive agreement is usually the longest step in an acquisition. Some such agreements are over 50 pages long, although the typical one is probably no more than 12 pages. No matter the length, the lawyer for the party that does not produce the first draft will undoubtedly have lots of changes, and it may take weeks to come to agreement on all of them.
The definitive agreement is usually drafted by the buyer's attorney, especially in cases where the buyer has done previous acquisitions. However, there is certainly no rule or custom prohibiting the seller's attorney from doing so if the parties agree.
The next step in the process is typically due diligence, which means the buyer's review of information and documents provided by the seller in response to the buyer's list of requests. The purpose of due diligence is to help the buyer decide whether to proceed with the acquisition and, if so, whether any previously offered terms need to be changed.
The buyer can conduct its review before or after it signs the definitive agreement. If the buyer chooses the latter, the buyer must have reserved the right to withdraw from the agreement if the investigation turns up undisclosed liabilities or other issues that would make the acquisition unattractive.
The list can be short if the buyer trusts the seller, or it can be 50 to 100 items long if the buyer is backed by private equity investors.