“Let’s have a celebration dinner, I want to thank the team for getting us here.” Hugh (not his real name) was rightfully excited. He had just signed a Letter of Intent (LOI) to sell his company for enough cash to take care of his children’s children. But I put a stop to the idea of celebrating too soon. I said, “Hugh, signing the LOI is great, and I know it’s taken you a long time to get to this point, but the next couple of months of due diligence will be brutal. Let’s get through that, get the deal done and get the wire transfer to your bank, then we can celebrate big time.”
Hugh started his company in 1998, yet came close to losing it during the recession of 2009-2010. But by 2014, he had turned things around and the company was an economic engine that looked unstoppable. When the unsolicited offer came in that summer, Hugh called me to help him weigh his alternatives. We did a present value analysis comparing the cash offer now versus continuing to run the company then selling it for even more in a couple of years. The analysis told us the “hold and sell later” alternative made the most sense for Hugh, even when the risk of waiting caused us to attribute a higher discount rate to that alternative. Hugh asked me to personally visit the CEO of the company interested in buying him and explain our logic. While Hugh wasn’t interested in trying to renegotiate, he wanted to maintain a positive relationship with the potential buyer.
My meeting with the CEO and one of his assistants lasted about 45 minutes. They didn’t quarrel with my analysis nor did I ask them to revise their offer. In fact, the CEO said, “Given your growth rate, your conclusion is correct,” which led me to believe he wasn’t interested in further negotiation. But an hour later I was in the airport waiting for my flight back to Nashville, and much to my surprise the CEO called with a revised offer. I called Hugh immediately and asked him to think about it over the weekend. When we met that next Monday, Hugh said he was willing to accept the revised offer with a couple of tweaks. We had the LOI ready to sign about a week later.
Hugh was ready to celebrate when he signed the LOI. He didn’t say so explicitly, but I got the sense he was already thinking about life after the business was sold. I had to explain to Hugh that, while signing an LOI is an important step in the process of selling your company, it’s just one step and there are many more and steeper steps to getting the deal done. Research tells us that 50% of all deals that get to the LOI stage do not close. Based on my experience, there are three reasons for this painful statistic: 1) the potential buyer learns something during due diligence that causes them to change their mind and/or renegotiate terms; 2) the seller decides that he/she is not yet ready to let go of the company; or 3) the “devil is in the details” problem. I have seen LOIs that are one page in length and I have seen them five pages; but either way, an LOI is never intended to capture all the terms of a deal. It’s often those minor details in due diligence that somehow become big details that cause the deal to hit a ditch.
Hugh’s deal had a couple of challenging moments as we progressed through the due diligence process. The legal work was handled by one of Nashville’s preeminent law firms, which ended up costing Hugh more than he expected. In fact, the exhaustive due diligence and extensive legal work to get the deal documented soaked up more energy and time than any of us expected. We eventually enjoyed that celebration dinner, but when I think back on Hugh’s call wanting an early celebration, I am reminded to not take getting an LOI signed as anything more than a single step in the long journey to closing.
JIM CUMBEE is President of Tennessee Valley Group, Inc. a retainer-based business brokerage and transition mediation firm in Franklin, TN. Cumbee is an attorney and has an MBA from Harvard Business School. He has a wide range of corporate and entrepreneurial experiences that make him one of the most sought-after business transition advisors in the state of Tennessee.
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