A letter of intent (LOI) is one of the most commonly used tools for moving a deal forward. The LOI outlines the basic parameters for an acquisition including the period of exclusivity, purchase price and consideration, preferred deal structure, and expiration date.
The LOI is your chance to communicate the strategic value of an acquisition and make sure that everyone is on the same page. Although typically it is not binding, by signing the LOI you both are morally committing to the acquisition so it’s important to carefully consider what you include in the document. Naturally, both parties may negotiate on different points such as purchase price or the period of exclusivity before signing the document to arrange the deal to their advantage. However, there are some items that you, as a buyer, should not include in the LOI.
1. Binding provisions
Most LOIs are non-binding, which means neither you nor the seller are required to execute the acquisition. A signed LOI marks the beginning of formal due diligence when you’ll get access to confidential information including the seller’s financials. Legally committing to executing the acquisition before you have all the information is a bad idea.
During the due diligence process and during negotiations you may uncover issues that make you want to alter the provisions set forth by the LOI. For example, you may wish to lower the purchase price due to liabilities, or decide you need an owner or executive to stay on for a period of time after closing.
2. Breakup fees payable by the buyer
This is self-explanatory, but you don’t want to pay a breakup fee if you decide to say “no” to a bad deal. Breakup fees are more common in large publicly-traded transactions which are subject to regulatory scrutiny. If, during due diligence, you uncover new information, or if something happens…Click to continue reading on The M&A Growth Bulletin.
This article originally appeared in The M&A Growth Bulletin, Capstone’s quarterly newsletter that delivers essential guidance on growth through M&A along with tips and tactics drawn directly from successful transactions completed in the market. Subscribe today to read the current edition and receive The M&A Growth Bulletin every quarter.
