Punching Out!: Getting to a Signed Letter of Intent

The letter of intent (LOI) is an important milestone in the sale of a business. It shows that both the buyer and seller have agreed in general to the valuation, terms, and conditions of a deal and that closing should take place in 60–90 days or so if due diligence, financing, final negotiations, and other items are successful.

Before the LOI stage, the parties have likely been introduced, signed an NDA, exchanged information, and met or talked several times. If an advisor represents the seller, the seller may have interacted with several buyers. Often, buyers are asked to submit a simpler indication of interest (IOI) before reaching certain milestones, such as a visit to the seller’s location. An IOI is typically very simple, around 1–2 pages long, listing the basics, such as valuation, terms (cash at closing, deferred compensation, other aspects of compensation), and any essential conditions. IOIs usually have no binding terms. Sellers and buyers often prefer to exchange an IOI before going too deep in the process to make sure both parties are in basic agreement on most key points.

The LOI serves as a roadmap for the buyer’s attorney to begin drafting the purchase agreement, so it is important that there are enough details in the agreement. Any major terms that are important to the parties should be included. Generally, the LOI includes the following:

  • Introduction: A brief summary of the buyer, their experience in the industry, and the reason for their interest in acquiring the seller
  • Valuation: The price that the buyer is offering, usually with some justification (for example, six times the average adjusted EBITDA for the previous and current year)
  • Terms: Cash at closing, escrow, deferred compensation (earnout, seller note, other items). If a seller’s note is included, the buyer typically lists the terms of the note, such as interest rate, principal and interest payment terms, and any other conditions. If there is an earnout, a basic formula is usually included. Some buyers wish for the owner and/or management to have a continued ownership stake in the company after closing. In that case, the amount of ownership, terms, and buyout conditions should be included
  • Assets/liabilities: Especially for an asset sale, it is important to list what assets and liabilities will be included in the deal, such as accounts receivable, inventory, accounts payable, etc. Almost all deals have a balance sheet adjustment clause to account for any changes in working capital during due diligence
  • Cash/debt free: For many asset sales, the seller keeps any cash in the business but pays off any debt. If there are any operating leases, equipment leases, building leases, etc., these should be spelled out
  • Legal structure: Asset or stock sale (this could be very important for tax purposes, especially if the seller is a C corporation). Many buyers prefer an asset purchase to help avoid past undisclosed liabilities of the seller, such as legal, environmental, employee, and other issues
  • Financing: The buyer should indicate how they will afford the deal, such as using cash on hand and/or current borrowing capacity, or if they will need to raise debt or equity. Sellers should be careful of buyers who have a financing contingency, as it may take the buyer 60–90 days (or more) to secure financing. A seller may end up having to renegotiate later with the buyer’s lenders or investors after already spending a lot of time negotiating the LOI
  • Exclusivity period: This is typically one of the few binding conditions of an LOI. The seller is pledging to not negotiate with other buyers during the due diligence period, which is often 60–90 days. The buyer is spending significant time and money on due diligence, and both parties are spending a lot of money on attorneys, accountants, and other advisors. If a seller is well-prepared, the buyer is well-financed, and nothing major comes up in due diligence, deals can close within 60 days or quicker
  • Ownership/management transition: How long will the owner(s) stay, their compensation, and roles. Some buyers want employment agreements for key employees
  • Building/lease: If the seller owns the building, this is a significant component of the deal. Many buyers do not want to commit to a real estate purchase. If the business is difficult to move, such as a PCB shop, buyers typically will want a long-term lease. If the building is leased from an unrelated third party, a buyer will want to confirm that the building owner will approve the new tenant and not change the terms of the lease
  • Going concern or consolidation: Especially for smaller deals, buyers may wish to move the seller’s business into the buyer’s facility (consolidation) while buyers for larger deals usually want to keep the seller’s facility as a going concern. It is important to make it clear, especially if the buyer wishes to do a consolidation
  • Environmental: Whether buying the building or not, for both PCB and PCBA deals, buyers often want to complete a Phase 2 environmental report. Since these reports can take 30–60 days to complete and review, it is usually best if the seller has this completed before going to market
  • Breakup fees: While common in larger deals, most smaller deals do not have a breakup fee, or the fee is fairly small. Often, the parties commit to a certain breakup fee figure, or to cover legal/accounting expenses of the other party, up to a certain amount under certain conditions. Both buyers and sellers are concerned that the other party will drop out for no good reason, such as simply changing their mind. Buyers are also concerned that due diligence will reveal that the seller’s financials are substantially incorrect, or that other undisclosed issues will arise
  • Reps, warranties, and insurance: Some LOIs get into more details, such as the general terms for the seller’s representation and warranties. For deals currently around $25 million or more, many parties consider rep and warranty insurance to cover large post-closing issues. Premiums for this type of insurance are coming down, so it may become more common for smaller deals as well
  • Others: The list of terms can go on for a while, but some common terms are state of jurisdiction, good faith clauses, normal conduct of business, indemnification, disclaimers, any shareholder or other needed approvals, closing conditions, confidentiality (if an NDA has not already been signed), a clause that each party is responsible for their own expenses, and others

An important decision can be whether to under-negotiate or to over-negotiate. LOI negotiations take a while to complete, typically 1–2 weeks. If both parties are motivated to complete a deal and were already generally on the same page, these negotiations can be smooth. If LOI negotiations drag on, it can be an indicator that due diligence and the purchase agreement negotiations are going to take forever.

There is a trade-off between negotiating everything in the LOI or leaving it for the purchase agreement. A typical LOI is 5–6 pages, but for larger, complex deals, they can be over 20 pages. Each deal is different, but if things are tough-going during the initial dating period (LOI), just think what the wedding planning (purchase agreement) and marriage (post-closing) will be like.

If your deal gets to a signed LOI, congratulations—the hard work has just started! Hopefully, the seller has already prepared the materials for a data room (or can produce those quickly), the buyer will move according to schedule, nothing will come up in due diligence, and the deal will move quickly to closing. Good luck!

Tom Kastner is the president of GP Ventures, an M&A advisory services firm focused on the tech and electronics industries. He is a registered representative of StillPoint Capital, LLC—a Tampa, Florida member of FINRA and SIPC—and securities transactions are conducted through it. StillPoint Capital is not affiliated with GP Ventures.

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2019

Punching Out!: Getting to a Signed Letter of Intent

03-28-2019

The letter of intent (LOI) serves as a roadmap for the buyer’s attorney to begin drafting the purchase agreement, so it is important that there are enough details in the agreement. Any major terms that are important to the parties should be included. Here's a list of the very important items in the LOI.

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Punching Out! Why Sell to a Private Equity Group?

02-27-2019

One category of buyers that is often overlooked is private equity groups. PCB/PCBA owners either think that their company would not be of interest to a non-strategic buyer, or they have a negative impression of financial buyers. Here are six reasons why companies should consider selling to a private equity group.

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Punching Out! Beware of Cultural Issues in M&A Deals

01-28-2019

Company culture is hard to define and manage, but it is a critical factor in making an M&A deal successful. It is also often ignored or misunderstood during and after due diligence because culture is a "soft" science instead of a "hard" subject like finances, legal contracts, IP, or accounts receivable, among other things, which makes culture a difficult factor to deal with.

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Punching Out! Creating PCB Industry Giants and Mid-majors Through Acquisitions

01-03-2019

Summit Interconnect announced the acquisition of Streamline Circuits. Summit itself was created in 2016 through the merger of KCA and Marcel, and is backed by a private equity firm. In the PCB and PCBA industry, TTM Technologies is the giant King Kong of acquisitions, growing from just $80 million in revenues 20 years ago to over $3 billion today.

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2018

Punching Out! Avoid Surprises During the M&A Process

11-27-2018

No one likes surprises, especially in merger and acquisitions (M&A) deals; there are enough unknown variables to start with. As the deal progresses, tensions start to rise, so any additional variables can cause a disproportionate response. Below are some ways to avoid surprises, and how to deal with them when they come up.

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Punching Out! How to Avoid Key-Person Risk

09-06-2018

PCB West 2018 is next week in Santa Clara, California (September 11–13). Can you go to the show and visit a winery or two without your shop falling apart? Have you taken a vacation in the past few years? Can you afford to not do board rework on a holiday weekend, like this past Labor Day? If you answered “no” to any of these questions, you may have key-person risk.

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Punching Out! Beware of Customer Concentration Risk

08-08-2018

One of the biggest risks in M&A is customer concentration risk. It is hard to avoid as a business owner; if a customer is giving you orders, you generally take them! The next thing you know, your customer has 90% of your sales and they own you. We see this a lot in both the PCB and contract manufacturing industries.

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Punching Out! Dealing with Family Businesses

06-28-2018

Some families may have spent this past Father’s Day discussing family business issues, including when, how or whether to pass the baton. There are several issues to consider when dealing with a family business.

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Fact or Myth: Do 80% of M&A Deals Fail?

05-09-2018

We are often asked by business owners if the commonly quoted figure is true that 80% of mergers fail to meet expectations after closing. There is a fair amount of research on large ($1 billion+), public deals that suggests that the 80% post-closing failure rate may be true.

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How to Prepare for a Smooth Post-M&A Deal Transition

04-05-2018

Selling a company is an exciting process, as well as time-consuming, stressful, and complex. Both sellers and buyers are sometimes so caught up in the deal that they forget to properly plan the post-deal integration.

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Cross Border Deals: What to Look for and How to Manage

02-22-2018

My firm has been approached by foreign firms several times this year and in 2017 who want to acquire PCB, PCBA, or other electronics companies in North America.

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Punching Out! Top 10 M&A Deal Killers

01-25-2018

I am often asked about some of the reasons why M&A deals die. Although this is a very painful subject, hopefully through sharing these reasons we can help some deals survive the M&A process. Here are my top 10 M&A deal killers (and some of the solutions).

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2017

Punching Out! Survey on State of the North American PCB M&A Market

12-29-2017

Recently, my firm surveyed about 20 PCB manufacturers in North America with an estimated greater than $10 million in revenue. Quite a few replied, and we have spoken with many others throughout the year, which gives us a good view on the state of the PCB market. If I did not contact your shop recently, it is because we already talked within the last 12 months.

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Punching Out!: PCB/PCBA M&A Top 10 FAQs

11-13-2017

We talk with owners a lot about the possible sale of their businesses. Here are the top 10 questions asked by PCB/PCBA shop owners about the process.

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Punching Out! Case Study—Lessons on a Deal

10-19-2017

This is a story of one of our clients, a U.S. contract manufacturer that sold a few years ago. To maintain confidentiality, the names have been changed and the details slightly modified.

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Punching Out! Making the Process Easy (M&A Process Engineering)

09-06-2017

In the M&A world, there are companies that make it easy (or at least easier) and those that make it difficult. By making the process easier, sellers should see better valuations and terms, and have a smoother deal process.

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Punching Out! Bridging the Valuation Gap Between Buyer and Seller

06-13-2017

PCB acquisitions in the U.S. are down so far in the first five months of 2017, with only two announced deals (HT Global Circuits’ acquisition of Pho-Tronics in April; American Standard Circuits’ acquisition of Camtech in May); and one anonymous deal that I am aware of that has not been announced. This compares with 11 announced deals in 2016. There are a variety of reasons for the decline, but one reason could certainly be the valuation gap between buyer and seller.

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Punching Out! How to Put a Wrench in the Rumor Mill During the Sale of a Company

05-23-2017

When selling a house, the owner’s agent puts a sign in the front yard, posts info on the Web, and invites buyers over for an open house. When selling a car, we put a sign on the windshield and take out an ad with our phone number on it. However, when selling a business, some owners do not even tell their spouses.

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Punching Out! Selling a Company—Seeing it as a Triumph, Not a Defeat

04-25-2017

Somehow, there is a still a stigma that selling a company is a negative for the owner. Many people think that there must be something wrong, otherwise, they would not be selling. In reality, exiting a business should be looked at as a triumph for the owner, not a defeat.

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Punching Out! 10 Ways to Increase the Value of Your PCB/PCBA Shop

03-22-2017

I have worked with a wide range of companies in the PCB, PCBA, and other tech and electronics sectors. Through the years, I have developed some ideas on how companies can improve their valuation. Some of these ideas are simple and involve little cost, other ideas are more long-term and involve more effort or investment.

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Punching Out! When Should I Call an Investment Banker?

02-20-2017

The quick answer is ASAP. Even if you are not considering the sale of the company for 5−10 years, it is best to be educated and prepared. Give your advisor (or a few advisors) a call to discuss what can be done to get the company ready for a future sale. The worst time to call an i-banker or business broker is when you are forced to sell due to poor performance, health issues, pending bankruptcy, or dispute with a partner or manager.

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Punching Out! Types of Company Buyers in the PCB and EMS Sectors

01-09-2017

Mergers and acquisitions in the U.S. PCB sector have been in the news recently, with at least 12 deals completed over the past year, and several more in the works. In contrast, the EMS sector has been relatively quiet, but that may change now that the presidential election is over.

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2016

War Stories from the Front Lines of Deal-Making

09-16-2016

Here are some war stories from my experience in working on M&A deals in the PCB, EMS, and electronics fields. The names and details have been changed to protect the innocent.

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Timing: When is the Best Time to Sell?

08-18-2016

A few of the top questions we receive relate to the timing of the sale of a business. The first is, "Is now a good time?" The second one is, "How are market conditions?" These are the top FAQs.

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The PCB Sector—What Buyers Look for and Recent Deals

07-14-2016

The past few months have seen a rash of PCB deals in North America, for a variety of reasons.

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What the Heck is Adjusted EBITDA?

06-07-2016

If you are looking to sell or buy a business, you will most likely come across the term ‘adjusted EBITDA.’ Other common terms are adjusted cash flow, owner’s discretionary earnings, earnings after add-backs, etc. What do these terms mean, and why are they important?

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The Additive Process: Tips on How to Buy a Board Shop or Assembly House

05-14-2016

One of the quickest ways to grow a business is to acquire another business. At the same time, acquiring a business can be risky, and a really bad deal may put your original business in jeopardy. Here are some tips on how to make acquisitions.

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Your Baby’s Ugly, Now Get Over it (How to Work with Buyers)

04-14-2016

Here’s a scenario: An owner has gone to market and is starting to get feedback from buyers, and shockingly, not everyone appreciates the hard work and achievements that went into the business. Buyers may not understand the business, or they may be trying to position things for a low offer. In any case, it is important to know how to work with buyers.

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Putting Together the Deal Team

03-21-2016

When preparing to sell, remember the old saying, “He who represents himself has a fool for a client.” While many owners might be tempted to go it alone, in my experience it pays to have a deal team to help prepare a company (and the owner) for a sale

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Punching Out: How to Sell Your PCB/Assembly Shop

02-04-2016

You are thinking of selling your PCB or assembly shop. Perhaps you are contemplating retirement, you have no successors, and the thought of going to the office on Monday is driving you crazy. This column is designed to help your planning efforts. Future columns will go deeper into each subject

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