Selling a registered investment advisory (RIA) practice is a major decision, and it’s easy to get caught up in the excitement of receiving an offer from a potential buyer. But before you dive in and sign that letter of intent (LOI), there’s something important you need to know: even if most terms of the LOI are non-binding, it’s still advisable to hire an attorney before putting pen to paper. Why? Because what may seem like just a preliminary document can have significant legal and financial consequences down the line.
Let’s break down why hiring an attorney at this stage is so essential, especially when you’re faced with issues like nondisclosure agreements, no-shop provisions, and the risk of making early concessions that could weaken your negotiating position later.
First of all: While much of an LOI is often labeled as non-binding—meaning that the parties are not yet legally obligated to go through with the sale—certain provisions are typically binding. And these are not minor details you can ignore or gloss over. Two of the most common binding clauses in LOIs are nondisclosure agreements (NDAs) and no-shop provisions.
Nondisclosure agreements protect confidential information that is exchanged during the sale process. When you enter into negotiations with a potential buyer, you’re likely to share sensitive details about your RIA, including financials, client lists, and proprietary strategies. A binding NDA ensures that the buyer cannot share or use this information for any purpose other than evaluating the deal.
However, not all NDAs are created equal. An attorney will help you review the NDA language to ensure that it’s robust enough to protect your interests. For instance, you’ll want to make sure the definition of “confidential information” is broad enough to cover all the critical data you’re disclosing. You’ll also need to be clear on how long the confidentiality obligations last—some NDAs may have indefinite terms, while others may expire after a certain period. Without an attorney’s guidance, you could end up with a weak NDA that leaves you exposed if the deal falls through.
The no-shop provision is another binding clause to pay close attention to. This clause prevents you from seeking or negotiating with other potential buyers for a specified period, effectively locking you into exclusive negotiations with one party. The idea behind a no-shop provision is to give the buyer confidence that they are not wasting their time and resources in negotiations while you shop around for a better deal.
While it may seem reasonable, the no-shop provision can put you at a disadvantage if the negotiations stall or if the buyer starts making demands you hadn’t anticipated. A skilled attorney will help you evaluate the length and scope of the no-shop provision, ensuring it’s not overly restrictive and allows you some flexibility in case things don’t go as planned. Without this legal advice, you could find yourself wasting time with a buyer that no longer seems attractive.
Second, there are many important deal terms not often addressed in letters of intent that can have a significant impact on the seller that should be negotiated at this phase before the seller goes too far down the road with a prospective acquiror.
For instance, did you know that most buyers will still want the right to terminate the employment/consulting arrangements with the selling owners and their employees at any time for any reason after the transaction if the owner or employees are staying on with the buyer after the transaction. It’s important for sellers to probe how this would impact their overall payout in the transaction, especially if there are post-closing price adjustments or earnouts that can impact the seller’s overall payout based on the seller’s contributions after the transaction closes. Sellers should negotiate during the LOI phase for protections to their future payouts in the event they are terminated prior to the end of the measurement periods for such payouts.
Similarly, did you know that typically buyers will want the owners and employees of the seller to be subject to restrictions on competing with the buyer and soliciting any clients and employees for five years from the closing of the transaction (in addition to similar restrictions on soliciting clients and employees post-closing)? Sellers should take the opportunity to negotiate the scope of such restrictive covenants while other terms (such as the overall purchase price) are still being negotiated. Once the letter of intent is signed, it is harder to negotiate these points when the purchase price and other key terms have already been agreed upon, even if such terms are technically non-binding.
In conclusion, although most sellers feel like they have a second bite at the apple after the LOI is signed, there are numerous benefits to retaining an attorney to assist in negotiating the LOI for the seller.
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