InSight

Exit and Growth Strategies for Middle Market Businesses

Letter of Intent – The Start of a Beautiful Relationship?

By Craig Allsopp | Jun 22, 2016

Letter of IntentOne of the major milestones in the purchase or sale of a business is securing a Letter of Intent. Though not as sparkly as an engagement ring, a signed LOI represents the intentions of a buyer and a seller to march down the aisle together.

At the same time, the LOI serves as something like a pre-nuptial agreement – spelling out the general terms and conditions that govern the relationship necessary for a buyer to consummate a transaction.

Like most things marital, things can get a little sticky when discussing the particulars. Some deal principals and their advisors leave no stone unturned in crafting an LOI, while others prefer a simpler approach – a basic letter that covers important terms such as the purchase price and closing conditions while leaving most of the other details for the final sales agreement.

So what is important to remember about an LOI?

  • An LOI is a proposal and not a guarantee that a final agreement will be reached. The LOI describes the intent of the parties to join together, but should not be interpreted as a commitment to close.
  • In most cases, LOIs are non-binding, with the exception of provisions to cover matters relating to items such as confidentiality and exclusivity. To avoid ambiguity, binding clauses in an LOI should be clearly labeled as such.
  • An LOI is the start, not the end of the transaction process. Business owners should be careful to keep their eye on the ball after they have a signed LOI in place. One of the best ways to ensure the marriage happens is to improve company performance while an LOI is in force.
  • The substance of the LOI is more important than its form. Sections describing the transaction, consideration to be received, details of payment terms, timing to close, contingencies to satisfy and access to information are all important in getting to yes.
  • Use your lawyer and investment banker as sounding board. As flattering as it may be to have a serious suitor, be certain the chemistry is right before committing to tie the knot.

Posted by Craig Allsopp.

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