Series: Prepping for an M&A Deal
#2: The Letter of Intent (LOI)
After a potential buyer expresses interest in your company, and you have taken care of all the expectations from Blog #1 of this series the next step is typically receiving a Letter of Intent (LOI) from the potential buyer. Note that the LOI may be from a private equity firm or other investor, typically referred to as a financial buyer, or from a company in a business similar to yours, typically referred to as a strategic buyer.
A LOI is a non-binding document (except as noted below) outlining the key terms of the proposed deal, essentially setting the stage for negotiations. Think of it as laying the foundation for a house—while it’s not the finished structure, it provides the necessary framework upon which the final agreement will be built. A well-drafted LOI often saves time and expense in a deal because it lays out the most highly negotiated terms upfront.
What Happens When You Receive an LOI?
The LOI isn’t just a formality— it is the next step in selling your company. It shows that you have a legitimate buyer who is seriously intending to commit. Though non-binding, the LOI provides a blueprint for the binding agreements that will eventually (and hopefully) follow.
Key Elements of an LOI
An LOI typically includes:
- Purchase Price: How much the buyer is offering.
- Payment Structure: How and when payments will be made (lump sum, installments, etc.).
- Retention: Details about whether the current management team will stay on, or what that may look like when the business is acquired.
- Due Diligence: A timeline and due dates for reviewing financials, contracts, and other business documents.
- Exclusivity: A period during which you can’t negotiate with other potential buyers, which is to justify the buyer’s time and effort in analyzing your company. Note that, unlike the rest of the LOI, the exclusivity provision is binding.
- Acquisition Documents: To varying degrees, the LOI will set out some of the main provisions of the acquisition document, e.g. the terms of the indemnity provisions, which tend to be among the most highly negotiated provisions.
Should I hire a lawyer?
While the LOI is non-binding, its terms are critical because they form the foundation of the final agreement. Hiring a lawyer early on can help you review the document, identify any red flags, and ensure that the terms are in YOUR best interest. Hiring a lawyer early helps review the document, spot red flags, and protect your interests. A lawyer can identify which points are worth negotiating to boost your value. They also highlight which areas aren’t worth stressing over, letting you focus on key deal aspects. Engaging an attorney at the LOI stage is far more beneficial than waiting until later.
The Impact of Receiving an LOI
An LOI is clearly an indication that there are one or more interested parties in acquiring your business. In addition, a private business does not necessarily have a readily determinable value, so it is also an indication of the value that an arms-length buyer attributes to the business. This can have various ramifications, including consequences for tax and estate planning. For this reason, it may be advisable to consult with a financial advisor prior to receiving the LOI to the extent that valuations are relevant to the financial planning process. A financial advisor may also have input into how an acquisition should be structured.
Now that we understand what an LOI is, stay tuned for the next blog where we’ll dive into the main M&A agreements and documentation phase. You won’t want to miss it!
As always, remember, if you need any legal help or guidance as you prepare for your M&A journey, don’t hesitate to reach out—we’re here to support you at every step!
Your legal team,
Inspire Business Law Group.