Although buyers usually prefer not to include price for fear of ramifications later, most sellers want to see a price mentioned in the LOI. If this is the case, I recommend inclusion. The key is to establish a narrow price range. If you believe the business is worth $35 million, then the LOI should propose a price between $34 million and $36 million. If you were to suggest a range between $30 million and $40 million, the seller would remember only the $40 million, while your board will remember only the $30 million!
More important than the price range, though, is a detailed briefing on how you arrived at your numbers. This includes a detailed list of three major inputs for initial valuation—any financial documents you’ve received from the prospect, the information you have acquired in meetings, and any assumptions you’ve had to make. You can also include charts and graphs to further substantiate your initial offer.
The main purpose of your briefing is to take some of the emotion out of the debate over price. Both sides now have a relatively objective document to work from. Transparency in the math removes much of the mystery from the price negotiations and gives you a solid basis to incorporate any new information. In particular, the assumptions that you include in the LOI place the onus on the seller to provide more accurate data. As new information arises, you can progressively adjust your calculations to arrive at the final price.
*This post was adapted from David Braun’s Successful Acquisitions, available at Amazon.com