In this episode, Michael and Brad share the story of an entrepreneur who signed a In this episode, Michael and Brad share the story of an entrepreneur who signed a non-binding Letter of Intent (“LOI”) for the sale of his wellness centers. Tune in as we spot the red flags in the sale and discuss the elements that make for a great LOI.
Listen to the full episode using the player below, or by visiting one of the links below. Below is the episode’s transcript which has been edited for readability. If you have any questions or would like to learn more, email us at firstname.lastname@example.org.
Intro: [00:00:00] Welcome to Legal 123s with ByrdAdatto. Legal issues, simplified through real client stories and real world experiences. Creating simplicity in three, two, one.
Brad: Welcome back to another episode of Legal 123s with ByrdAdatto. I’m your host, Brad Adatto with my cohost Michael Byrd.
Michael: As a business and healthcare law firm we are sometimes triggered by certain buzzwords our clients will say in conversation. We know that there is a potential disaster when we hear these words and are immediately on high alert. This season’s theme is red flags.
Brad: Awesome. What’s today’s red flag?
Michael: Well, easy there, cowboy I have things to talk about first. We will get there all in due time. I want to talk today about trigger phrases that are actually more like pet peeves than red flags.
Brad: Well we had an [00:01:00] entire conversation around this and misused phrases, like holding your cards too close to your chest and you make fun of me for all my old movie discussions.
Michael: Okay. Well, this is fair, but a little bit different and it’s worth it. I promise. So just bear with me, tell me what you think when someone starts a sentence with no offense, but…
Brad: Ding? They’re about to say something extra offensive. But you are not allowed to say anything because you’re actually protected by a shield that comes up because you said no offense at the beginning.
Michael: Yeah it’s a barrier and it triggers me every time I hear it.
Brad: How about, I’m not one to toot my own horn, but…
Michael: Ding! The 1950s are calling Brad. This seems like a very old person expression, but your point is well-taken when a person says, not to [00:02:00] toot my own horn. Guess what they’re about to do? They’re about to toot their own horn. Or how about don’t take this personally…
Brad: It’s another free pass to say whatever you want that other person and they’re not allowed to take it personally. What about to be honest…
Michael: I actually understand this one to a certain degree that people use it as a crutch. It’s obviously really common right now. And I hear my kids say it, I hear people that I know and love say it, but if you think about it, it’s pretty funny. It implies that had you not clarified that you’re about to be honest, you may otherwise have not been honest or that you not being truthful when you don’t clarify at the beginning that you’re going to be honest.
Brad: A total sidebar, after Katrina, trying to buy a car in Baton Rouge with my wife and the salesperson said, well, if I’m being honest with you, blah, blah, blah, blah. If I’m being [00:03:00] honest with you, blah, blah, blah, blah. If I’m being honest. What part was he not being honest with us, maybe when he got to like the sales price or something? Random examples, Michael and so here I’ll put it all together. What we did, I think I got this Michael, to be honest, you know, that I’m not the one to toot my own horn. So please don’t take this personally, but everyone, everyone knows I’m better than you.
Michael: I’m going to call BS.
Brad: Ding! You’re not allowed to say anything nor take it personally because I called it. Plus it must be true because I said I was going to be honest.
Michael: I feel like I just got lawyered.
Brad: Yeah, you did. Now you get it. I’m curious of how we’re going to connect everything we just went through, these phrases to today’s story.
Michael: You waited for it and so now I’m going to tell you our red flag today. Is non-binding letters of intent.
Brad: Okay. Michael, let’s stop. Hold on. I think we might have our first [00:04:00] vocabulary word of the day, which is letter of intent. Now people use this phrase some of them might call it a term sheet or a memorandum of understanding or a confidential agreement or even confidential letter. I’ve seen these are often the first steps in a business arrangement. If someone wants to sell their business, they will enter into a letter of intent or LOI, these letters articulates high level of important factors of terms and deals that they want to have inside of this deal. And if parties want to identify if they’re on the same page, they put it all together, hopefully inside of the letter of intent and then they could go negotiate the contracts with the deals later. And then sometimes they’re often non-binding, which means if the parties cannot work out the details, they’re not bound to the actual deal.
Michael: And the red flag is in the way the term nonbinding is used. So you go back to what we were just talking about. I mean, there’s nothing that’s red flaggy in of itself about the phrase to be honest or the other phrases, it’s just the way [00:05:00] they’re used in sentences. And so it’s the same thing here. You know, we’re usually told by our clients after they’ve signed an LOI or at the beginning of the process and then they’re like, hey, it’s no big deal. It’s non-binding.
Brad: Yeah. And I think the term non-binding creates this excuse that they don’t have to worry about much because it’s not really a big deal. Its non-binding, I can just get out of it whenever.
Michael: Yeah, exactly. Like if I told you no offense, so it does not matter what I say. I have immunity. The danger with using the non-binding term as a security blanket is that it actually does matter what the letter of intent says.
Brad: All right, Michael, to be honest, I’m ready to start today’s story.
Michael: Hmm. Well played sir so let’s do it. So our protagonist today, Brad is an entrepreneur’s entrepreneur. He’s a salesman’s salesman. He’s one step away from being a [00:06:00] TV evangelist. We will call him Benny.
Brad: Alright I am going to ding you because you have to explain what that means.
Michael: Well, the name for today’s inspired by the infamous televangelist, Benny Hin. Benny used to have miracle crusades and stadiums to heal people through his Faith healing.
Brad: And I just want to say that infamous, what I learned that word means is the vocabulary word from a movie, The Three Amigos. It means more than famous. I didn’t know if you knew that it’s infamous, so, all right. Let’s talk about our client Benny and I know him and he has a huge personality.
Michael: Yeah and he’s a great guy and he’s nowhere near as extreme as a TV evangelist. And so Benny Hin is more of a caricature of our Benny.
Brad: Yeah, Michael, but I am kind of starting to have a bad feeling about this. You [00:07:00] mentioned Benny who we both know well, and you said non-binding LOI.
Brad: Uh, Michael, this is your story. You can’t be dinging me.
Michael: Sorry I got caught up in the moment. I heard non-binding LOI and just reacted. But you are correct with your concerns so let me start with the moment we became involved in the story, which was about two months too late
Michael: Yes, absolutely. Right played ding. So Benny called me to ask me to upload a ton of business organization documents and legal contracts because he had a buyer to buy his wellness center and we’re going to call the buyer Fusilli Jerry.
Brad: All right I am dinging you on this one only because you are constantly making fun of me for my 80s movie references. Now we’re talking about, for those that don’t know, a nineties TV show reference.
Michael: Yeah, [00:08:00] Seinfeld. Fusilli Jerry came from the Seinfeld show. And so those who watch Seinfeld are going to probably find the humor and the name and the others are just going to have to bear with the references to Fusilli Jerry today. But it all came from an episode where Kramer found Fusilli Jerry a little statue made out of fusilli pasta and ended up having to go to the proctologist because George’s father, Frank sat on Fusilli Jerry.
Brad: Yes. The proctologist in the episode who Kramer actually became friends with was actually kind of funny because his license plate said Ass Man.
Michael: Exactly and I could have taken us down a whole different path. So we’re with Fusilli Jerry, instead of Ass Man, but as you’ll see, the buyer in this story made due diligence feel like a proctology exam for Benny. And so that’s what made [00:09:00] me feel inspired and think of Fusilli Jerry.
Brad: Yeah. And I think Fusilli Jerry is probably a better name than pasta man, Ass Man or the proctologist, so we will allow Fusilli Jerry.
Michael: Okay. I’ll let you do the pronunciations. I’m just going to go with the Texan accent, as I say. So Benny wanted to get these documents uploaded for due diligence for Fusilli Jerry to review.
Brad: Ding! Hey Michael, I feel like you just kind of started in the middle of the story and you failed to give any context. Why is Benny uploading documents? Did we skip a few steps?
Michael: I feel you to the core right now, you know me and my need for context.
Brad: Bad if I’m asking for it.
Michael: Yes. I had the exact same reaction when he asked me to start uploading documents. And so for me to properly tell the story, I had to give it to you like I received it and it was painful, so painful for me not to just go ahead [00:10:00] and give you the context, but now you know, and so I started my question to Benny was, is there anything, do you have a letter of intent for any context? I mean, did you sign a nondisclosure agreement or anything? Instead of just hitting me right here in the middle of the story.
Brad: Again, knowing Benny I’m actually terrified and curious as to how he actually answered this question.
Michael: Rightfully so. But he told me not to worry, which is a famous Benny thing.
Brad: It’s almost like saying, but to be honest, don’t worry, don’t worry. I’m protected I used the word don’t worry.
Michael: So he had been in discussions for a few months but was waiting to bring us in until he needed us as legal counsel. He signed a letter of intent, but it was no big deal because it was non-binding.
Michael: It was classic and we [00:11:00] hear this all the time and that’s why it made the season as a story. But I knew from that moment on that we were going to be scrambling.
Brad: Yeah. And this is especially crazy when you’re trying to get what’s going on, and is the buyer moving on to the proctology part of the exam here?
Michael: Oh, it gets better, Brad.
Michael: Ding, Ding! Benny had already started the proctology exam and hadn’t called me yet. He had uploaded everything that he had for due diligence and sent it over to Fusilli Jerry, but he didn’t want to bother us until he needed us.
Brad: So I’m hearing that no one reviewed it?
Michael: This is correct. Benny uploaded old unsigned drafts of important contracting attorney client privileged memos, and more.
Brad: Ding! I’m just going to ding it in general. I’m starting to sweat a little bit here. How did Fusilli Jerry handle it? [00:12:00]
Michael: They did what any private equity company would do. They used it to skewer Benny.
Brad: I’m assuming that this might have changed the price?
Michael: Oh yes, of course they did. They started out by creating a list of things Benny would have to do to clean up the business before they would even go down the road towards documentation. To make matters worse, Benny had another buyer appear and wanted to pay Benny 25% more to buy the company.
Brad: All right I’m not going to ding it because that actually sounds good, but I’m believing there’s a ding there. So what’s the problem?
Michael: Well, remember the non-binding letter of intent?
Brad: Oh no. Don’t tell me. I know it, it had some type of no shop and it was binding.
Michael: Yes, Brad. It did. And just so those that don’t know what a no shop provision is. It’s a provision in letters of intent and usually it’s binding and yes, it even appears in non-binding letters of intent that [00:13:00] essentially says that while the parties are negotiating to try to work the deal out, the seller will not engage in discussions to sell to anyone else. Benny was locked in for 12 months not to talk about selling to anyone else.
Brad: For the audience, 12 months is crazy long for a no shop deal.
Michael: I know. And Benny had no idea. What I’ve came to learn is he didn’t even read the LOI because it was non-binding. I think he skimmed the financial section to make sure it lined up with their back of the napkin talks that they had when they were trying to strike a deal.
Brad: Well, that’s pretty unbelievable. I don’t know what catchphrase works best with this because to be honest doesn’t work, and take no offense, but signing that non-binding thing was pretty stupid, but I said no offense. Let’s go to commercial, Michael and on the other side, we can talk more about non-binding LOIs from our legal [00:14:00] perspective
Access+: Many business owners use legal counsel as a last resort rather than as a proactive tool that can further their success. Why? For most it’s the fear of unknown legal costs. ByrdAdatto’s Access+ program makes it possible for you to get the ongoing legal assistance you need for one predictable monthly fee that gives you unlimited phone and email access to the legal team so you can receive feedback on legal concerns as they arise. Access+, a smarter, simpler way to access legal services. Find out more. Visit byrdadatto.com today.
Brad: Welcome back to Legal 123s with ByrdAdatto. I’m your host Brad Adatto with my cohost Michael Byrd. Now Michael, this season’s theme is red flags and I don’t know where to start.
Michael: It’s always been a fun and wild ride with Benny. He will be the first to tell anyone how great it is to work with ByrdAdatto and yet he [00:15:00] didn’t pick up the phone to call with the LOI or to call to tell us that he signed an LOI and was starting to share documents for due diligence.
Brad: So let’s just ding a couple of times in that one. Just double ding it.
Michael: Okay well let’s talk about LOIs. Walk us through the types of issues covered in a letter of intent.
Brad: All right. So a couple of different things. Again, when we discuss letter of intents or LOI, and we’ve talked about this in presentations or we’ve covered it in our M&A field guide, so for those who don’t know, the letter intent can be very deceptive. And the LOI purpose again, is to outline the key aspects of this potential deal. What is it? What are the parties? What are they looking for? What are some of the deal structures? And because the nature of M&A, or mergers and acquisitions, many of these terms may be subjective to change based on the outcome of the due diligence, which is where you kind of paused our story, which is he’s uploading all this due diligence, Benny. And of [00:16:00] course, there’s lots of other factors. In addition to developing the LOI, you should remember what is the purpose of the reason why you’re entering this transaction. So this could drive in my opinion, why you’re doing that? What should be in an LOI? Are you entering this because you’re doing an expansion, you’re buying a new territory, or you’re selling an old practice that you don’t want? Are you entering this to get some mailbox money, maybe even, or this is part of your retirement plan? Each of these concepts should and must affect how the buyer or seller will streamline that letter.
Michael: Okay. I don’t want this recorded, but those are all good points, Brad.
Brad: No one is listening to this, Michael. You’re fine.
Michael: All right so what should be in the LOI?
Brad: Right. So once we kind of establish why we’re selling it, we have this, the purpose set for ourselves. There are certain elements to every LOI that you should focus on. So I’ll skinny it down. So the first one is really trying to understand what portions should be binding and what portions should be non- [00:17:00] binding. I think we can come to the binding portion in a little bit, because I want to concentrate on other areas. You know, there’s like obviously something Benny completely skipped over and should’ve thought about. Clearly, you’re not going to do a deal, Michael, unless you really know the financial deal parts. And so people think, oh I’m selling it for $10 million. They don’t realize, well, that could be for cash, or for debt, or for stock. So again, financial terms, spelling those out will be very important. Then we go into the actual deal structure, which is okay, if I’m selling and what am I selling? Am I selling substantially all my assets, which becomes an asset purchase agreement, which we’ve talked about many times. Or I’m selling my business, I’m selling stock and I’m selling some of it or all of it. So again, that’s going to that structural piece will drive it. So now that we have our finances figured out and we even know how we’re selling it, we then start moving to the post-closing pieces, which are certain, they are sometimes called golden handcuffs or just sales handcuffs. But this is where are we [00:18:00] going to require you to sign an employment agreement? And if so, for how long? And as part of the sale, we have non-competes or non-solicitations or other types of non-despair agreements, all these type of things to protect the buyers and sellers, depending on your angle. And then of course we did talk about something called due diligence. And we’ve talked about this in other shows, Michael, but you know, that’s really the time in which you’re opening up all your underwear’s drawers and you’re showing everyone the good, bad, indifferent. In a good LOI, you’re going to outline the timeframe and the expectations as to what are the parties going to share and what type of information that will go between them.
Michael: Well, since we’re talking about Fusilli Jerry, it’s more like pulling down your underwear for the proctology exam than opening the drawer, but I digress. And one of the things that you mentioned when you were talking about structure is sometimes the financial aspects are connected to the post-sale handcuffs
Brad: Absolutely. And [00:19:00] my little 15 year old brain is stuck on the underwear drawer.
Michael: Let’s move on, Brad. We know we can’t handle this. So one misnomer with the non-binding LOI is that there’s a binding provision.
Brad: Yeah. And that’s the thing is that people that we’ve seen title it non-binding LOI and so they just say oh, it’s non-binding. And typically Michael, at the very end of a good letter of intent, any kind of LOI, there will be certain binding provisions. Often the binding provisions are something as simple as, hey, you have to keep this deal confidential, and you can’t let anyone know. As we discussed in this particular situation, other times they have other pieces to it, a no shop clause is when you have an exclusivity clause basically saying, hey, if we’re going to sit down and enter into this arrangement, we want to make sure that you’re not going out and talking to other people. And I think when we had Ben Hernandez on a while back, on a different show. Ben said something that was very interesting. A lot of times with these no shop [00:20:00] clauses if you’re trying to sell, you want to go out and say, hey, anyone interested this is what my deal is that I want to do. And you don’t have to enter into it when someone comes to you and they basically do an unsolicited offer. They’re always going to want to do an exclusivity period because they don’t want to negotiate. They don’t want you out negotiating with other people. And I think the last piece is, again, keeping up with is really, to me setting the tone of what this deal is going to be like. This is the time in which you can do this. Set the tone of the arrangement. A good LOI is upfront telling everyone how professional you’re going to be. And Michael, you know, you often see this where the parties will not put certain elements of a deal into it because they say oh Michael, if I put this in there they won’t sign the deal. And we always say that if it’s so important to you, you should put it in the LOI now because if you try and negotiate it later, you won’t have [00:21:00] it. And so those are all, you know, again, big pieces of taking mine. And I know Benny obviously missed out by not seeing the no shop clause. Obviously it blocked him from this potential other buyer that you were talking about. But I’m babbling now, Michael. Let’s jump in. What are some other non-binding LOI effects that you think should be considered?
Michael: Yeah. I mean, those are all great points and definitely things that Benny and the development of an LOI should set in motion, a discussion internally about the business itself. And so Benny’s wellness centers had a ton of compliance issues and he didn’t realize it. And had he gotten our help on the front end with the LOI, we would have started working through it and it would have affected his conversations with the LOI. It would have affected his negotiations with Fusilli Jerry and then of course the expectation setting for the due [00:22:00] diligence process, AKA the proctology exam.
Brad: Yeah. And I think for our audience, just to understand before I ask the next question, the pause button here for you and I, it’s a red flag that we hear all the time when someone says non-binding. Hopefully our audience now will also kind of key in on that since obviously Benny missed that piece. So let’s catch our audience up, Michael, what happened to Benny and Fusilli Jerry?
Michael: Well shocker Brad, the deal fell through.
Michael: I know. Benny ended up turning his attention back into the business and working on bringing it into compliance. And as long as Benny can stay focused, which is a big ask, he will be able to sell his business for more than either offer he received.
Brad: To be honest, I don’t think that’s possible. I want to catch up [00:23:00] with you in a second here, but I think one of the things that we definitely see all the time is if you are getting ready, and we’ve talked about this in other episodes, but I know we’re doing LOI talk and non-binding for this episode for spotting red flags, but one of the things hopefully the audience will see is when you are getting ready to go off and sign a binding or non-binding letter of intent, you realize that you need to get your house in order. Had he looked internally first, he would have been in a better position to have been able to sell himself. And even that way, if he had gone out and not spoken to his favorite attorneys in the world, ByrdAdatto, he would at least have been in a better position than he currently was. So now he’s back to the drawing board in some ways. And so those are some of my final thoughts just in general with this story on ways he could improve. Your thoughts?
Michael: Yeah. My final thoughts, I’m going to send this out to our entrepreneurs and our salespeople out there [00:24:00] who can connect and relate to Benny. They’re moving fast, making deals and details will follow for the ones that may follow in those footsteps. And so to them I say first, no offense intended at all, but you’re an idiot if you sign a non-binding LOI without getting some advice,
Brad: None was taken, the audience understood that you said no offense. You’re protected there. Michael, guess what? We have another show next Wednesday so we can kind of follow up to this LOI piece. We’re going to discuss Red Flags – This Is Just a Simple Sale.
Outro: Thanks again for joining us today. And remember, if you liked this episode, please subscribe. Make sure to give us a five- star rating and share with your friends. You can also sign up for the ByrdAdatto newsletter by going to our website at byrdadatto.com. ByrdAdatto is providing this podcast as a public service. This podcast is for educational purposes only. This podcast does not constitute legal advice, nor does it establish an attorney-client relationship. Reference to any specific product or entity does not constitute an endorsement or recommendation by ByrdAdatto. The views expressed by guests are their own and their appearance on the program does not imply an endorsement of them or any entity they represent. [00:25:00] Please consult with an attorney on your legal issues.