Letter Of Intent

Letter of Intent: A Vital Tool in the Formal Negotiation Process

Business transactions tend to be surrounded by a number of questions and concerns, particularly in the case of mergers and acquisitions. Either party involved would be remiss to jump headlong into such a situation without some level of planning and negotiation. At the same time, neither wants to be legally bound to the other party’s terms before having a chance to voice an opinion on the conditions of the transaction. This is where a Letter of Intent comes into play.

What is a Letter of Intent?

As the title indicates, a Letter of Intent essentially states the intentions of the acquiring firm as they apply to the target company. Via this type of document, the former clues in the latter regarding plans for the deal in question. This could be considered a middle ground between the concept stage of a merger or acquisition and finalization.

Recipients of the document may agree with the terms provided, counter with an edited version or respond with a different set of conditions entirely.

Which Items Should a Letter of Intent Contain?

First off, the presenting firm should provide a brief introduction in a conventional Letter of Intent pinpointing both companies to be involved. This would be followed by information pertaining to the previously-mentioned terms and conditions of the transaction. This type of declaration should likewise dictate a time frame in which the deal is expected to be completed as well as any requirements applying to the financial aspects of the agreement.

A list of the assets and liabilities to be included in the transaction should be documented as well. Depending on the type of company to be purchased or taken over, certain clauses may also need to be included regarding current employees. These fall into the category of special warranties. Such statements are defined as conditional elements of an agreement.

How Does an LOI Differ from a Memorandum of Understanding and a Contract?

The key difference of these components is the extent to which each is legally binding. A Letter of Intent is generally not considered legally binding as it is part of the negotiation process and precedes the memorandum of understanding and the final contract. That being said, inclusion of certain binding elements in a Letter of Intent is advised, such as:

  • Non-Disclosure Agreements: Stipulations identifying details to be kept confidential throughout the course of the transaction. While each party involved has a right to obtain information about the other, neither is allowed to share these findings with parties not included in the transaction.
  • Non-Compete Agreements: In many cases, both the acquiring and target firms will agree to refrain from attempting to acquire the other’s current clientele or employees.
    Those are only two of the most common legally binding clauses stipulated in a Letter of Intent. Some may also include agreements promising reimbursement of relevant costs in the event the transaction is not completed.

When these types of statements are incorporated in an agreement, they need to be clearly identified and specified as such. The target firm has a legal right to agree or disagree with each point covered in this document and request changes as deemed fit.

Once both agree to all terms and conditions set forth, a memorandum of understanding will be drawn up followed by the final contract, each of which will be legally binding.

Why is an LOI Important in Mergers and Acquisitions?

A Letter of Intent is designed to formalize and foster business negotiation processes while offering both parties a certain degree of protection. Though terms and conditions should be outlined in this type of document, legal advisors caution against the inclusion of excessive details. Doing so could negate the overall purpose of the LOI, rendering it a legally binding agreement in court.

In short, LOI’s should succinctly describe the presenting firm, its target company, overall intentions with the merger or acquisition, financial expectations, the period of time in which the transaction is expected to be completed and conditional aspects. It is not a legally binding document though certain restrictive clauses may be included.

A Letter of Intent is a tool meant to protect the rights of those involved and allow each firm a voice in the process. Once an agreement is reached, the parties will proceed to a legally binding memorandum of understanding and, ultimately, a final contract.

Document Management System Due Diligence

How to Use a Document Management System for Due Diligence

An online Document Management System (DMS) is a repository of documents that can be organised to suit the needs of an organisation.

A DMS is often used to replace the paper-based filing of an organisation and lends itself very well to being used for time-limited due diligence projects.

A DMS is typically used by the seller of a company to organise all the public and confidential information required by a purchaser to complete their due diligence.

How does a Document Management System help?

A DMS provides a number of clear advantages over paper-based filing.

An online DMS provides a single place to store and access information for both sellers and buyers. This removes the problem of paper-based documents being stored in different locations and possibly being lost or misfiled. Storing the information in digital format helps speed up the due diligence process.

The information held in the DMS is only accessible by those who have been assigned a user ID. This ensures the security and confidentiality of the due diligence process. Particular information can be made available to specific individuals. For instance; access to sensitive financial data may be given to a senior executives involved in a transaction but not made available to general staff.

A DMS offers fast searching of information – text searches across all files can be quickly entered. There is no more laborious trawling through paper-based files to locate information.

An online DMS can be setup within a matter of hours and documents can be uploaded right away to be available for review. This is considerably quicker and more cost effective than setting up a secure data room in an office.

Collect and organise your documents

Before a seller sets up their online DMS, they need collect all the information required for the due diligence process. This will most likely be a combination of paper based and electronic documents.

It is recommended all paper documents are scanned and saved in a common format such as PDF. Wherever possible, the text of the document should be searchable (this may require paper documents to be scanned by Optical Character Recognition (OCR) software to identify the text on each page.

Draw up a list of the main categories of documents for due diligence. This will assist the filing and searching of information. Use a clear and consistent method to name all your documents.

Managing your documents during Due Diligence

During the due diligence process, the seller will be responsible for managing all the documents for all the prospective purchasers.

User IDs have to be assigned to each purchaser and the correct level of access to document given. Some documents, because of their confidential nature, will only be made available to some users.

Any new documents must be uploaded to the DMS and purchasers advised of the document’s location.

If at any point a purchaser does not wish to proceed, the seller can immediately revoke their user ID and prohibit access to the information in the DMS.

 

For many organisations, an online Document Management System is the ideal technology to support the due diligence process. It offers ease of use, setup and management at a cost much lower than organising a dedicate data room to store information.

Docurex is the preferred DMS of many companies who require secure access to their confidential digital documents.

CC Flazingo Photos Flickr

The Vital Role of Due Diligence

Information is key to the business world.

The due diligence process is the way by which businesses can accumulate the necessary information to make the best investment decisions.

The world of business has always rewarded the individuals and companies that carry out thorough due diligence on their transactions. Whether it is to buy a property, acquire a business or launch a company on the stock exchange – success has most often gone to those with the most facts and who are able to make the best informed decisions.

So what is due diligence and what must both seller and buyer consider during the process? In this article we will look at due diligence from the perspective of both sellers and buyers.

What is Due Diligence?

Let’s define “due diligence”. Investopedia states the following:

“Due diligence (DD) is an investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to a sale.

Generally, due diligence refers to the care a reasonable person should take before entering into an agreement or a transaction with another party.”
In the business world there are many occasions when it is essential to investigate a potential transaction in the most thorough way possible before proceeding. Due diligence allows a business to confirm the facts of a situation in order to make an informed decision.

The term due diligence has particular relevance and use in industries such as real estate, mergers and acquisitions and Initial Public Offerings (IPO’s) of companies.

Due diligence is undertaken to assess risk and opportunity. The process itself is meant to be non-judgemental but to provide objective information on which a decision can be made. Discover more about the world of due diligence in this article.

The Main Types of Mergers and Acquisitions

Due Diligence in Mergers and AcquisitionsAny company merger or acquisition will rely heavily on the due diligence process.

Some might say it the most critical process as it provides the raw information for the decision to proceed or call a halt. It is important to understand the difference between a merger and an acquisition.

A merger is an agreed joining of two organisations, usually as equals but with each company bringing different strengths. A merger is seen as a friendly and co-operative exercise.

An acquisition can either be friendly or hostile.

A friendly acquisition is where one company buys another outright. There are many cases of this happening where a company such as Microsoft or Apple will acquire a smaller company for some specific technology or expertise. The smaller company is swallowed by the bigger one and disappears from the marketplace.

A hostile acquisition takes many forms but will typically involve the company to be purchased recommending that their shareholders do not accept an offer. This can be a negotiating tactic in order to achieve a higher price for a sale.

In any merger or acquisition transaction it is critical that the purchasing company has conducted thorough and full due diligence on their target purchase. The information gained will form the basis of a price they are prepared to pay for the target company.

It is critical that all aspects of a company are fully understood before an offer is made.

Click here to learn about other types of merger and acquisition such as vertical, horizontal and conglomerate.

When is the right time to sell your business?

Wann sollen Sie Ihr unternehmen verkaufen? Frau mit SmartwatchWhile each business sale is unique, there are common themes for why business owners choose to sell their business.

Retirement Planning

Many owners of small and medium sized businesses reach a point where they consider selling their business as part of their transition to retirement. They no longer wish to work the hours required to run a business and are looking for a way to realise the value that is locked within their business.

New investment

Businesses large and small all require a level of investment to continue to be viable. Whether it is in machinery, stock, staff, advertising or operating funds, all businesses thrive on new investment. One of the recognised ways of finding new investment is to sell a business to an organisation that has the funds to invest.

Change in the market

All industries are evolving and changing. The business practices that worked 2 years ago may be obsolete tomorrow. Margins that were high last year may be razor thin this year. These changing conditions may affect how current owners view the future potential of a business. It may require a new owner to bring in new skills or funding to address the changes in the market.

No matter the reason for selling your business, ensure you have all your facts organised, prepared and available for potential purchasers to review.

Click here to discover more reasons for why business owners choose to sell.

How to prepare for due diligence when selling a business

If you are considering selling your business, you will need to prepare for the due diligence process. While it is the responsibility of the purchaser to ask all the questions it is necessary for the seller to be able to answer them.

A seller who is prepared and organised will have a much better chance to sell their business. Quick answers, clear documentation and easy access to information are all the responsibility of the seller if they wish to assist the fact finding process.

A seller should take these important steps:

  • Place all the documents in one central location that is accessible by all potential purchasers
  • Assigned User IDs to restrict access to only the necessary information
  • Organise information in clear, logical categories.
  • Scan all relevant documents for easy electronic access.

A seller has to undertake a considerable amount of work to prepare for a sale. However, the more work that is completed up front will result in a quicker and more efficient due diligence process.

Find out more on how to gather, organise and store information as part of the sale of a business.

If you are buying a company are you taking these due diligence steps?

So while a seller is gathering all the relevant information relating to a sale, it is important for a purchaser to have an extensive list of questions. A detailed and methodical approach is necessary to ensure all the important questions have been asked.

There are many factors to consider when you analyse a company you plan to purchase.

Some of the key indicators you need to study include:

  • Capitalisation
  • Revenue, Profit and Margin
  • Valuation multiples
  • Industries and competition – who are the main competitors within the industry?
  • Ownership structure – who are the owners, what are their rights and obligations?

Of course, there are many more aspects that need to be covered including legal, environmental and staffing questions. Click here to discover more about this topic.

How to use a Document Management System (DMS) for Due Diligence

diagramm-unternehmensankauf-due-diligenceA common requirement of both the sellers and purchasers of an asset is the need for easy access to the information involved in a transaction. The quicker information can be shared; the quicker decisions can be made.

An Online Document Management System (DMS) is a popular solution for sharing information as it provides secure, structured, centralised storage of data that can be accessed by all parties.

It is the seller of an asset or company who will typically setup an online DMS to support the due diligence process. The seller should consider evaluating and setting up the DMS prior to the transaction so that they have the administration of data and user access already organised before engaging with potential purchasers.

The setup of an online DMS is an extremely simple process. Once an account is confirmed, extensive online help and an easy to use interface make the DMS simple to use.

Once the DMS is configured, information can be uploaded to the DMS into the relevant folders for easy searching and review.

Click here to find out more on how to use a DMS as part of a due diligence process.

In summary, due diligence is an essential process for large scale business transactions – from real estate to company mergers.

The process is critical to both sellers and buyers. Sellers must have a means by which to present all the required information to allow a transaction happen and purchasers need a means to confirm all the facts before making a decision.

An online Document Management System is seen as the best solution to meet the needs of both parties. Sellers have an easy to administrate system that helps them organise and protect their data and buyers have a single online location to analyse and review documents for a transaction.

“Handshake – Two men” by Flazingo Photos is licensed under CC BY 4.0

due diligence steps

If you are Buying a Company are you taking these Due Diligence Steps?

If you plan to buy a company, the due diligence process is probably the most important aspect of the entire transaction.

Due diligence research and analysis ensures a buyer is confident in the true value of the company and how this relates to the price of the company for sale.

Below are the major elements that should be studied during the due diligence process:

Company capitalization

How much is the company worth in today’s market place? Are shares publicly available and if so, which stock exchange do they trade on?

Revenue, Profit and Margin

What are the company’s figures for at least the last three years? Get information from earlier years if possible.

Has revenue grown year on year? Are profits steady or sporadic? Are profit margins consistent with the industry norm? These are just some of the questions which will be asked during the due diligence process.

Industries and Competition

In what industry (or industries) does the company compete? What are the major trends in these industries? Are there threats or opportunities in these industries arising from new regulations, legal class actions, new technology or new competition?

What is the market position (Leader? Follower?) of the company and how do they compare to their major competitors? What are the dominant business models used by the competition and how well does the company execute this model?

Valuation Multiples

Given the price being asked for the company, what is the valuation multiple and how does it compare to the industry average? If there is a large difference between the price being asked and the valuation multiple of the competition, what is the reason? Is it justified?

Ownership and Management

Who actually owns the company? Do the founders still hold stock? Is it a family run business? What is the percentage of shares held by founders and current management? This helps show how much they have invested in the success of the company.

Examination of Balance Sheet

Use a financial expert to help analyse the balance sheet. Understand the assets, liabilities, cash flow position, debt levels and other key indicators to the financial health of the company.

Stock History, Options and Dilution

How has the stock price performed over the last 10 years? How does the market perceive the company and how is this reflected in the stock price?

Do current stock owners have options to sell stock? Is the company committed to issuing more stock in the near future?

Risks to the Company

Are there any specific risks, legal cases, regulatory concerns or competition issues that threaten the company? Consider all aspects of the business.

 

Something to remember as part of due diligence is that in the first instance it is simply an information gathering exercise and not one that requires any judgements to be made. Keep an objective mind to the information collected and undertake a full analysis when you have collected all the data you need.

Completing a full due diligence process will ensure you have the best possible understanding of a company’s potential.

We recommend you download a free due diligence checklist from www.due-diligence-checklist.net to ensure you have asked all the questions above (and more).

A hand with a pen, which is going to sign a contract.

Selling a Business? How to Organize Your Documents for the Due Diligence Process

There are many aspects of selling a business that have to be considered. Legal, accounting, financial, operations, human resources and much more.

Potential buyers of a business need to know they can access all the relevant information to the sale.

Providing business information in a logical, organized format for all buyers not only helps build trust during the sale process but can reduce the time it takes a potential buyer to complete their due diligence analysis.

The 3 Critical Steps to Organizing Information when Selling Your Business

We believe there are 3 critical factors in providing information for the due diligence process:

  1. The seller must make sure all relevant documents are provided. There is no missing information that buyers will have to additionally request. It is important the seller anticipates all questions that a buyer may have.
  2. All documents are organized in a logical manner for potential buyers to review. No time is wasted by buyers trying to find information about the business or claiming they were not given the information. All documents must be clearly labelled and organized for easy review.
  3. All documents are in a single, secure location that gives equal access to information for all buyers. By locating all the documents in a secure, online location the sellers can guarantee security and control of their information. The buyers know they all have equal access to the same sale information.

By taking the time to locate every relevant document, organizing the information in a logical format and presenting this information in a secure, online location, business sellers reduce or even eliminate any frustration in the due diligence process.

The 7 Groups of Document to present for Due Diligence

Every business is unique and every business sale will have its own distinctive characteristics.

However, every business sale has common documents and information that must be provided such as legal, financial and tax. Knowing this helps us group and organize information for due diligence.

The 7 main document groups we suggest the sellers of businesses use to organize their information are:

  1. Legal Situation
  2. Tax Situation and Financial & Economic Situation
  3. Market, Industry and Strategy
  4. Environmental
  5. Insurance Coverage
  6. Technology Situation
  7. Employee Situation

This framework provides an easy to understand reference for buyers.

Storing documents for the Due Diligence Process

Once you have organized your documents for due diligence, they can be presented to all potential buyers via a secure but easy to use online service.

You need to make sure that potential buyers see the same version of each document and no altering of documents can be undertaken by the potential buyers. This usually requires sellers to use a specialist, online data room service to securely hold their due diligence documents.

For more information on this proven approach to organizing your key documents for the due diligence process, visit www.due-diligence-checklist.net to download a free, detailed 30 page checklist.

wann firma verkaufen?

When is the Right Time to Sell your Business?

Business owners work hard to provide a good quality service to their customers but there can come a time when it makes sense to sell the business.
It’s not an easy decision and how do you know it’s going to be the right one?

 

5 Reasons Business Owners Choose to Sell Their Business

Let’s review 5 of the main reasons owners consider selling their business.

1. Retirement planning

There comes a time when it is more important to relax and enjoy life rather than work in your business every day. A retiring business owner is often someone who is keen to get the best value from selling their business but not at any price.

2. New investment required

Sometimes the owner has taken the business as far as possible and without new investment it cannot grow any more. New money and management may be needed to take the business to the next level.

3. Change in the market

Sometimes a particular type of business becomes popular: video rentals, tanning salons, payday loans are just some types of business that have become very popular at one point in time.

This could be an opportunity for an existing owner to cash in a heated market and get the very best possible price for the business at the top of the market.

4. Change in the legal / regulatory landscape

A business owner may sell because the government has introduced new legislation that affects how their business runs.

Examples include new environmental controls for building firms, new privacy laws for technology companies or a change in government subsidies for medical firms.

The owner may choose to sell the business rather than adapt to the new laws or regulations.

5. New opportunities

A business owner may have been offered or seen another business opportunity in another industry. Selling their current business can provide the capital to begin a business elsewhere.

Whatever the reason for selling a business, every business owner will need to consult a wide range of professionals including lawyers and accountants to ensure all the financial and legal implications from the sale are fully understood.

 

Preparing Your Business for the Due Diligence Process

An important part of the sales process is preparing your company information for the due diligence process. The smoother the due diligence process is for potential buyers, the more likely an owner can sell their business.

A proven way to ensure the most efficient due diligence process for a business sale is to create an online data room where all documents relating to the sale. Documents are available in a secure online location and the ability to review these files is limited to prospective buyers.

Docurex provides organizations with a secure, online data room to ensure transparency and fairness in critical business sale transactions.

Contact Docurex for more information today.

 

The 8 key reports you must make available to potential buyers of your business

The 8 key reports you must make available to potential buyers of your business

If you are looking to sell your business or are acting on behalf of a business owner who wishes to sell, you no doubt understand the importance of the correct disclosure of your company information.
The due diligence process offers buyers the opportunity to review documents and ask relevant questions of the current business owner. This gives buyers the complete picture of the business they are looking to buy and ensures the seller meets all disclosure obligations from a financial and legal perspective.
The more company information a business owner can present in the first instance, the quicker the sale process is likely to become.
Buyers will see less risk in the purchase if they have their questions answered before they have even thought to ask them.
So what is a proven way to organise your company information during the due diligence phase of a business sale?
In our experience, we have found the following 8 key reports to be critical in helping describe the company for sale and answer any questions buyers may have.

The 8 Key reports

  1. Legal Situation
    Seen as the foundation report for all other reports. Establishes the legal entity(s) involved in the transaction, contracts, key legal documents, outstanding or impending litigation and other legal matters.
  2. Tax Situation
    Tax returns, tax audits and current and future tax liabilities.
  3. Financial report
    Provide the last 3-5 years financial information, a complete breakdown of the company’s balance sheet, audit reports, financial planning for next 12 months and more.
  4. Market, Industry and Strategy
    Overview of the market in which the company operates. Economic, industry factors affecting the business – positive and negative. How is the company differentiated from competitors? What is the marketing strategy? Sales pipeline.
  5. Environmental
    Are there environmental impacts on the company? Are there environmental obligations?
  6. Insurance Coverage
    Confirms the types and level of insurance in place. Confirms any claims made on insurance policies.
  7. Technology
    What is the technology used by the company to manufacture/create/deliver its product or service? What is the technology used to support the administration of the business?
  8. Employees
    This is a human resources report. An overview of employees, their roles and positions in the company. Includes level of experience within the company, pay levels and achievements.

These 8 reports outline a wide selection of documents that need to be presented, most likely to multiple buyers, as part of the due diligence process.
The storing of critical documents must be done in such a way as to give each potential buyer an equal opportunity to review the company information and ask any due diligence questions.
The security, confidentiality and access to these documents must be tightly controlled through the due diligence process.
The docurex cloud based “dataroom” is a popular solution that helps the seller organise and control access to confidential information as part of the business sale.

CC Steve Wilson Flickr - Due Diligence

Discover the Importance of Due Diligence

The business world relies on the due diligence process on such a regular basis that it is often taken for granted.

However, it is worth reminding ourselves of the important role due diligence plays and how it helps companies make well informed decisions.

A Definition of Due Diligence

The term “Due Diligence” is used in business to describe to the process by which a purchaser will collect information and analyse a transaction before agreeing to or rejecting the deal.

The more thorough the due diligence carried out by a purchaser, the greater the chance they have of making a correct assessment of a transaction.

The following excellent explanation of the purpose of due diligence comes from www.investinganswers.com.

“Due diligence helps people and companies understand the nature of an investment, the risks of an investment, and how (or whether) an investment fits into a particular portfolio. Due diligence isn’t just good sense, it’s a duty investors owe to themselves — doing this sort of “homework” on a potential investment is often essential to making prudent investment decisions.”

The Facts Come First

The purpose of the due diligence process is to collect facts and information.

In the first instance it is not meant to generate immediate conclusions or opinions. Due diligence should be focused on gathering the facts and nothing but the facts of a particular situation.

It is typically up to the purchaser in a transaction to determine the information they need to make an informed decision. The purchaser must then present the requests for information and the seller will then collate the information and present their response.

Once all the facts have been gathered it is then possible for the relevant experts and professionals to analyse the data to assess the viability of the transaction. The quantity and quality of relevant and timely information that is gathered will directly affect the quality of the analysis of a deal.

Assessment of Risk and Opportunity

Every business transaction has an element of risk and an element of opportunity.

It is the duty of a purchaser to discover as much as possible about a particular transaction to identify those risks and opportunities.

For example: When buying a company, the purchaser must understand the level of obligations the company has – payroll, creditors, contracts, debts, legal, regulatory and environmental to name a few. Without a clear picture of these obligations a purchaser will not fully understand the risk they are accepting in buying the company.

On the other hand, there are opportunities to be identified as a result of the due diligence process. These opportunities include Information on regulatory changes that may give the company a new advantage in the marketplace, a new product may be in development but not yet announced or the introduction in new technology may dramatically reduce costs and increase margins.

It is important a purchaser uses the appropriate experts and professionals such as accountants and lawyers to assess both the risk and opportunity.

In summary, due diligence is the vital process by which companies gather and then analyse information about a transaction so they can make an informed decision.

The upfront effort placed into due diligence will potentially save or make millions of euros for a company. Company executives ignore due diligence at their peril.