why use a letter of intent in an accounting practice acquisition

Why Use a Letter of Intent in an Accounting Practice Acquisition?

Ken Berry, CBIPrincipal and Vice President


I have presented several webcasts in the past month and in all of them there have been questions about the use and value of a Letter of Intent (LOI) — in our process this is typically a non-binding agreement that signifies agreement in principle on the core deal points and agreement to negotiate in earnest on all remaining items. Some brokers advise to skip the LOI and go straight to the purchase agreement and an LOI is not typically used in the market at large. So, why do we advocate the use of an LOI when purchasing a business? In our experience, an LOI is a critical component in structuring a win-win transaction. We use them on virtually every deal. Here are the main benefits we see:

• More efficient use of time • Proceeding with a clear understanding and agreement in principle • Trigger point for taking the next steps

More efficient use of time: Some people feel an LOI puts the cart before the horse. We find exactly the opposite to be true. If you were to go to an unknown area, would you want a map of the area? Well that is exactly what the LOI is: a map of the major deal points. In today’s busy world it is important to be sure two parties are going down the same road and in the same direction before spending too much time working out all the details of a transaction. Proceeding with a clear understanding and agreement in principle: The key elements of the LOI should be negotiated beforehand and can be used as a guideline to prepare the purchase agreement. It should state that, if all information during due diligence confirms what was represented, that the buyer intends to complete the purchase under certain conditions. The key elements should include:

• All parties to the transaction • Type of deal structure • Price • Payment structure • Non-compete • Transition plan • Closing date • Contingencies (i.e. due diligence, financing, etc.) • And identify other items to be negotiated.

Trigger point for taking next steps: In addition to setting the key elements of the deal, the LOI is also a trigger point for critical milestones during process. Those trigger points are:

• For the seller to remove the practice from the market and focus on the single buyer.

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• For the buyer and seller to begin conducting their due diligence. With agreement in principle on the main terms the seller will have more comfort in opening the books and sharing client information and the buyer will have more comfort in providing financial information.

• For the buyer to pursue financing. The financing process takes times and banks require either an LOI or purchase agreement as part of the loan package. So an accepted LOI is a critical component to securing financing.

We have a saying in our firm that smooth transactions make successful transitions. Basically, if two parties cannot agree on the elements of the LOI, they will probably have a hard time negotiating while dealing with the minutiae of the purchase agreement. Normally, once the key points of the deal are negotiated up front, the rest of the transaction tends to work much more smoothly. About ProHorizons ProHorizons is a national brokerage and consulting company focusing on accounting practice sales, acquisitions, and business development services since 1995. We launched our business with goals that remain consistent today: To guide accounting professionals toward achieving their business objectives while still in practice and to shepherd them toward their next professional or personal chapter when it’s time to transition. We come to our client relationships from a place of direct experience: we are fellow business owners who understand what it is like to invest your life in building a practice. Therefore, we take care to deliver comprehensive, time-tested, professional guidance that result in your success.

Ken Berry Principal and Vice President Ken Berry has worked closely with John Ezell and ProHorizons since June of 2002. During that time he defined, developed, and refined ProHorizons’ internal processes, ProHorizons’ role in the accounting practice sales industry, and ProHorizons’ level of service to and communication with its existing and potential clients. In 2005, he joined the team as a full-time broker. In January 2007, he joined John Ezell as a principal/owner of ProHorizons.

Ken is co-author of ProHorizons’ book, Successful Practice Sales: The Complete Guide to Buying, Selling or Merging Your Accounting, Consulting or Tax Practice, which serves as a guide through every nuance of these potentially daunting business transactions, from exploring the complete lifecycle of a sale to identifying pitfalls to avoid, and much more.




Previously, Ken spent nine years working in marketing, sales and business development at Crisp Learning, a leading publisher of corporate training and personal improvement books, videos and computer-based training programs.

Ken has earned the internationally recognized Certified Business Intermediary (CBI) designation from the International Business Brokers Association (IBBA). Ken holds a BS in History from Willamette University in Salem, Oregon. In his free time, he runs, plays soccer, skis, and coaches youth soccer. He completed his first half-marathon in October 2006.

Ken can be reached at (800) 729-3242 or via email.

For more information, please contact us:

ProHorizons Network, Inc 333 W El Camino Real, Suite 210

Sunnyvale, CA 94087

800-729-3242 (p) 800-874-4532 (f)

[email protected] www.prohorizons.com

http://www.ibba.org/

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http://www.prohorizons.com/

why use a letter of intent in an accounting practice acquisition

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