A Letter of Intent (“LOI”) is an expression of the buyer’s intent to acquire a seller’s business on specific terms and conditions. It is considered a milestone in the transaction process, primarily because it is predicated on the concept that the seller and buyer have agreed upon the basic terms, assuming that due diligence supports assumed facts.
An LOI is generally non-binding as to substantive terms (price, transaction structure, and forms of consideration) but is often binding as to process items. These include access to seller’s information, cooperation by the parties, seller’s exclusivity obligations, seller’s obligation to conduct business in the ordinary course, governing law, confidentiality, and allocation of expenses.
Sellers need to manage their expectations and be aware that buyers can still walk away from the deal even after they have reviewed sellers’ sensitive information provided in due diligence. If the buyer is a direct competitor, this can have unintended consequences for the seller, notwithstanding well-drafted non-disclosure agreements with limitations on use of the information. For example, will a strategic buyer determine through due diligence that investing the purchase price in their own business is more cost-effective than paying an acquisition premium? It is critical that the seller and his/her advisor carefully evaluate all offers and determine if the buyer has the actual intent and financial wherewithal to close the transaction before signing the LOI.
Here are some basic considerations for evaluating an LOI.
It is crucial to understand that an LOI is not the end of the transaction process, but for legalities. It is, in effect, just the beginning. Due diligence and quality of earnings review, drafting the asset purchase agreement, and financing the acquisition are all yet to come. The terms of the LOI can have a serious affect on the seller’s ability to realize his expectations through this process.
Don Rooney
Transaction Director
Benchmark International
T: +1 813 898 2350
E: Rooney@BenchmarkIntl.com
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