Is the LOI binding?
The LOI’s purpose is to outline the structure of the deal (e.g., assets being purchased, purchase price, timing of payments, key conditions) and to create an exclusivity period during which we mutually work with the seller toward consummating the transaction. Think of it like going under contract to buy a home: the terms are agreed in principle, and both sides now spend the time and money required to verify everything and get to a definitive agreement.
Only the exclusivity and confidentiality clauses in the LOI are binding. Everything else in it is non-binding until the purchase agreement is signed.
Can the price and structure agreed upon in the LOI change?
Though the LOI is non-binding, we take seriously our responsibility to be good faith negotiators. We only sign the LOI if we are willing to close on a deal at those terms (given everything we know about the business at the time the LOI is signed). Across our four acquisitions, we haven’t had any decrease in the amounts or timing of payments after the LOI was signed.
However, price or structure could change if the underlying performance of the business materially changes during the exclusivity period, or if diligence uncovers financial or legal risks that were unknown or undisclosed before the LOI was signed.
To borrow the home purchase metaphor again: if you go under contract and the inspection turns up a cracked foundation or a roof that needs replacing, you are going to need some accommodation from the seller for those expenses or risks. It works the same way here.
What comes next after the LOI is signed?
Once the LOI is executed, we mutually enter the “exclusivity period”, which gives us the runway to do three things. First, verify everything we have learned about the business to this point. Second, complete additional legal and financial review. Third, draft and finalize the purchase agreement and any ancillary legal agreements required to consummate the transaction.
Additional data requests
The process picks up in the same seller portal you have been using to this point. We will add a new set of requests, and they fall into three tracks: financial, business, & legal.
- Financial requests include tax returns, bank statements, an AR aging report, client deposit detail, debt and PPP documentation, payroll by division and location, and how shared or corporate costs are allocated (if applicable).
- Business/operations requests include employee benefit detail, outline of key processes and systems, active vendors, physical assets, organizational chart, internal KPI dashboards, marketing materials, client satisfaction surveys, and a conversation about how to best carry out the transition / integration with Pando.
- Legal requests are critical in this phase and include entity and organizational documents, contracts, HR, licensing and regulatory, intellectual property, insurance, any disputes, liens, and anything else material.
Note that for any requests where you don’t have the item that we are asking for, just let us know. Think of it like your annual physical with a physician – the answer to many (or most) of the questions is “no”, but it’s important for the physician to ask them anyway. It sometimes feels the same with our diligence questions or requests.
Third-party diligence vendors
In addition to asking for additional data / documents we also involve two outside vendors to help us with the transaction.
First, we engage a CPA firm to perform a quality of earnings (QoE) review. Their job is to confirm that the financial statements match the bank statements in all material respects. Additionally, they provide an independent assessment of the normalized earnings (adjusted EBITDA) of the business to confirm the basis for the business valuation / purchase price.
Second, we engage outside counsel to perform a legal diligence to confirm that there aren’t any areas of liability that we need to be aware of before we take ownership of the assets of the business. The legal team also begins drafting the purchase agreement based on the LOI.
We pay for these vendors, and the data they need is covered by the items we ask for through the seller portal.
What happens if diligence turns something up?
As stated earlier, our intent is to close on the terms set out in the LOI. In practice, most of what diligence surfaces is bookkeeping cleanup, a number of minor legal flags to be addressed after closing, etc. rather than anything that changes what the business is worth. We expect these items, are not troubled by it, and will not use them as a lever to reopen price.
If something genuinely material comes up, meaning it changes the earnings of the business or creates a real liability, we will bring it to you with our work shown and talk it through before we propose anything. You will not receive a revised number out of nowhere late in the process. If we cannot get comfortable, we would rather tell you that early and directly than get to a worse deal.
Why sign the purchase agreement first and close a few weeks later, instead of doing both at once?
A number of things can only happen once there is a signed, definitive agreement in place, and they cannot reasonably be compressed into a single day. Caregiver and employee onboarding paperwork, payroll and benefits enrollment, insurance, bank and systems setup, and client notifications all sit in that category.
Doing it all at once would require that either (a) all caregivers, clients and employees find out about the deal while it’s still being negotiated, or (b) that we take on responsibility for ongoing care of your clients before we’ve re-onboarded your employees and caregivers.
A staggered sign-then-close allows us to finalize the deal and then announce the deal to employees, communicate with clients, onboard caregivers and employees, etc.
What happens when the purchase agreement is signed?
Once both parties sign, the deal is binding and enforceable for both parties. The only thing that would stop it is a closing condition in the agreement going unmet, such as required caregiver onboarding or licensing steps that cannot be completed.
How do we tell your team?
Immediately after signing, we work with you to announce the partnership. We will provide templates, communication guides, and what has worked in prior transitions for talking to office staff and caregivers. The message reaffirms that the team and the clients remain the priority, introduces Pando Home Care and what we care about, explains what to expect through the transition, and invites people to ask questions.
What gets done between signing and closing?
Four key items. (1) We onboard every employee into our HR and payroll systems and collect employment and compliance documents; (2) California regulations require that each caregiver be formally associated with our Home Care Organization before providing care under our license; (3) Schedules, payroll, billing, and client records are connected to our systems so there is no gap in service or employee pay; (4) We update licensing, insurance, and compliance documentation so state, insurance, and operational standards are met. We work collaboratively with your team through this stretch to keep each work stream on schedule.
What happens at closing?
Once the closing conditions are met and onboarding is complete, we close. We usually choose the first day of a new payroll and billing cycle as a closing date to avoid a split bill period or pay period. Upon closing, closing cash is wired, caregivers are associated with the new HCO, payroll and scheduling are live, and the business formally transfers ownership and operations.
Will current caregivers and admin employees need to sign new employment agreements?
Yes. Employment agreements do not transfer in an asset purchase, so every caregiver and office employee signs new employment paperwork between signing and closing. Completing onboarding for active caregivers is a closing condition (i.e., the deal can’t close until the condition is met). For us to serve clients without interruption on day one, we need to employ the caregivers that have assigned shifts, so we work collaboratively with you and your team to send out new onboarding documents and answer any questions.
On the pay day immediately following the closing date, accrued vacation is paid out by Seller’s Company and balances reset as of the close date. All employees who are already enrolled in medical benefits are offered enrollment in our benefits plan and employees who are not enrolled are eligible according to the HR policies for new employees (after one month for admin employees and six months and 780 hours for caregivers).
Will current clients need to sign new service agreements?
In most cases, no. We list your client service agreements as assumed contracts in the purchase agreement, which means your agency’s obligations under each agreement transfer to us at closing and the client does not need to sign anything new.
However, we will have our legal team review the current client contracts and may decide to have each client resign an agreement if we prefer the legal protection or other terms included in the client agreement that we use.
When should I tell my employees?
During the LOI period, most owners keep the deal confidential or only share with a small need-to-know group.
We build the communication plan together during the exclusivity period. Employees tend to have similar (and understandable) questions about their pay, reporting structure, benefits, etc. We want to ensure the deal is finalized and all answers to these questions can be addressed prior to announcing the transaction.
Anything we missed?
If there is a question this does not answer, please feel free to reach out to Wesley Bosco at [email protected].
David Mella, Pando Home Care
Wesley Bosco, Pando Home Care