Should I use an LOI?
The quick answer is…No. At first blush, the Letter of Intent would seem like a good idea. It allows the buyer to demonstrate to the seller that they do indeed intend to purchase. It also lays out the general terms of the deal. These would both seem like clear positives. However, we find the step to be not only unnecessary, but potentially harmful to the deal. Bear in mind that we are talking about fairly simple, 100% purchase transactions.
LOI Problem # 1: By laying out the general terms, the specifics are delayed.
When you look more closely, you will recognize that the LOI generally creates more questions than it actually answers. What one party may feel is important can be completely different from what the other party feels is important. More often than not, problematic terms are unintentionally (or perhaps intentionally) omitted to delay conflict.
LOI Problem # 2: Lawyers without boundaries can put any transaction at risk.
If you leave all the details to your lawyers, guess what tends to happen…you discover complexity that you never knew existed. We’ve seen lawyers create 40 + page purchase agreements on relatively straight-forward accounting practice purchases. That is unacceptable. When everyone is motivated to come to terms and “lock down the practice” people tend to negotiate in a timely fashion to work through any sticking points quickly without getting hung-up on immaterial matters.
The bottom line…it’s far simpler to go straight to the purchase agreement.
If you have done a good job of screening and selecting, you should be confident of intent anyway. Yes, it will take a little more time for the parties to sign on the dotted line. The old saying…“an ounce of prevention is worth a pound of cure” applies here. We find the additional time spent to thoroughly go through all of the terms on the front-end is a very worth-while use of everyone’s time. The purchase or sale of an accounting practice can be a fairly simple transaction…no need to add additional steps that makes it harder than it needs to be.
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