Chapter 8: Negotiation and the letter of intent (LOI)

Once a buyer has seen the sales presentation and is seriously interested, the first offer arrives. Now the negotiation begins — and it is about much more than the price. Structure, payment, warranties, handover assistance, the non-compete clause and the timetable can together matter more to your final proceeds than a few per cent on the price.

Prepare for the negotiation

• I know my bottom line — the lowest after-tax proceeds I will accept.
• I have prioritised the terms: What matters most to me (price, cash payment, employees, a short handover)?
• I know what I can give the buyer that costs me little (e.g. longer handover assistance).
• I have an alternative if the deal falls through (another buyer, continued operation, a business lease).
• I have a firm grip on my own figures and can explain all normalisations.
• I have spoken to my accountant and lawyer about structure and terms.

Assess the offer — more than the price

Good negotiating principles

• Let the buyer make the first offer, especially if the price has not been stated. It tells you about the buyer’s expectations.
• Justify your counter-offers. Point to earnings, growth, comparable deals and the strengths of the business — not just to what you would like to get.
• Negotiate the package, not the individual parts. Agree on all material terms together, so you do not give way on one point and then lose another.
• Make concessions in return for something. “If I lower the price, more must be paid in cash.”
• Keep the tone good. You will probably have to work together during the handover period, and the buyer will be taking over your employees and customers.
• Write it down. Confirm all oral agreements in writing.
• Use Sitavo’s offer feature for offers and counter-offers, so the history is documented and you can both see what was offered and when.

Pricing formats and offers on Sitavo

How the negotiation unfolds depends on the pricing format you choose in the listing:

• Fixed price: The buyer can buy at your price straight away. The deal starts at the agreement step, and you confirm the price and what is included before it goes any further.
• Open to offers: You show an asking price, and buyers make offers. You can accept, decline or counter. With a minimum offer, offers below that amount are declined automatically.
• Price not disclosed: Buyers bid freely. This can tell you about the market, but it also attracts low offers.
• Bidding round: You set a bidding deadline so everyone knows when to bid by. Bids in the final minutes extend the deadline, and you are free to choose between the offers — even after the deadline.
• Auction with binding bids: You set a starting bid, a bid increment and optionally a hidden reserve price. Bids are public and binding on the buyer, there are no counter-offers, and when the auction ends the business is sold if the reserve has been met. See Bidding rounds and auctions.

How to respond to an offer in practice is explained in Receiving offers. What this chapter says applies whatever the format: know your bottom line and assess the whole package.

The letter of intent (LOI)

When you have agreed on the main terms, they are written down in a letter of intent — also known as an LOI or term sheet. It marks the transition from negotiation to the actual deal process and forms the basis for due diligence and the purchase agreement. Use Sitavo’s letter of intent.

Typical content

• The parties and what is being sold (assets or shares).
• Price and price mechanism, including how debt, cash, inventory and working capital are handled.
• Form of payment: cash on completion, vendor loan, earn-out, escrow.
• Conditions for completing the deal, e.g. satisfactory due diligence, financing, transfer of the lease or licences.
• Due diligence: scope and time frame.
• Exclusivity: a period during which you do not negotiate with other buyers.
• Confidentiality — often with reference to the NDA already in place.
• The seller’s role after the handover and any non-compete clause.
• Timetable for signing and completion.
• Costs: Each party typically pays its own advisers.
• Which parts are binding, and which are not.

Binding or not?

As a starting point, a letter of intent is not a binding agreement to complete the deal — both parties can usually withdraw if due diligence or the further negotiations do not turn out as expected. However, certain provisions are normally binding, typically confidentiality, exclusivity, costs and governing law. The text must make it clear what is binding. If the wording is unclear, doubt may arise as to whether an actual agreement has been concluded. So have your lawyer review the letter of intent before you sign.

Exclusivity

The buyer will almost always demand exclusivity, because due diligence costs time and money. That is reasonable, but keep the period as short as possible and tie it to progress: if the buyer has not completed due diligence or sent a draft purchase agreement by a certain date, the exclusivity lapses. That way you avoid being strung along while other interested parties disappear.

Letters of intent on Sitavo — optional

On Sitavo the letter of intent is optional. By default, the deal is quick: accepted offer → confirm the agreement → payment → handover. If you turn on “Require a letter of intent before the agreement is confirmed” in the listing settings or in step 5 of Create listing, a letter of intent is generated with the price and terms of the offer, which you both accept before the agreement is confirmed. The setting applies to new offers. For smaller digital deals the quick route is often enough; for physical businesses, share deals and deals with an earn-out or vendor loan, a letter of intent gives more certainty. If you want to write it yourself, you can use Sitavo’s letter of intent template.