One of the first significant steps in the route to buying or selling a business is the signing of the Letter of Intent (LOI). The purpose of the LOI is to express certain understandings and agreements between the buyer and seller of the prospective business and can be viewed as the first step in formalizing the negotiation process. The LOI is non-binding contract between the buyer and seller but may include some binding provisions such as an exclusivity period and confidentiality provisions. This document represents the end of preliminary due diligence and the beginning of the formal due diligence process where the buyer and seller will determine whether this company is the right fit.
While the letter of intent should be detailed enough to ensure that the main material issues are brought to light and potentially negotiated early on, it is also important to understand that more detailed discovery’s will happen during the formal due diligence process. During the formal due diligence process additional issues may surface that were previously not outlined in the LOI and may need to be negotiated prior to the final purchase agreement. Generally speaking, the more that is covered in the LOI the smoother the process will tend to go.
It is common that the LOI will be prepared by the buyer’s attorney and presented to the seller’s Business Broker or M&A Advisor. While it is the M&A Advisors role is to manage the negotiations of the purchase price and deal terms of the agreement, it is strongly recommended that the seller engages a transaction attorney to review and approve the agreement prior to execution as the LOI will set the tone for transaction going forward.
While information will vary depending on the business, some specific items to include in the LOI are:
This section should outline the price offered based on the perceived value of the company, often determined by a multiple of EBITDA as well as many other factors that are specific to the business. Some LOI’s will include an explanation of the assumptions that were used to come to the purchase price. This amount could vary by the time the actual Purchase Agreement is signed and could be subject to change based on various findings during the formal due diligence process. Therefore, including an explanation of the method used could help with any potential adjustments if required. One option to reduce the likelihood of a buyer reducing their purchase price later in the process is to provide additional preliminary due diligence information prior to buyer prior executing an LOI. We have found this especially useful when receiving offers from multiple buyers.
Transaction or Deal Structure
The transaction structure outlines the deal and will determine how the sale of the company will occur as well as cover debt terms and forms of payment. The deal structure can become a [Read more…]