Once a business buyer finalizes their decision of which target to pursue exclusively, writing a Letter of Intent (LOI) should be the next order of business. While LOIs are non-binding, their purpose is to establish parameters for the deal without locking both parties into an agreement to finalize a deal that they may choose not to complete.
The LOI allows the buyer to commence the highly confidential due diligence process. The LOI does not need to be as detailed as the formal offer, but it should include enough information so that the basic premises of the deal are outlined.
Each LOI is different, so there is no basic template available for writing a Letter of Intent. However, there are certain clauses that should always be included.
It is essential to create a nondisclosure agreement. This prevents both parties from sharing any of the information revealed throughout the M&A process, including the knowledge that the deal is underway. This protects the seller from losing clients and employees who may not be happy about the idea of the sale, and it also protects the buyer from having the seller leave them for another buyer later on down the road.
It is important to secure financing methods before the deal begins. If the seller is contributing to the financing, then get this information in writing so that they cannot turn around at the last moment and leave the buyer without proper funding. Unlike in the Indication of Intent (IOI), the LOI should name a specific valuation number for the business that is the agreed upon price.
Operations should be mandated to maintain a certain level of consistency throughout the deal process. The net worth of the business should not fluctuate during this time, so the business owner must continue to manage the company properly while the deal is underway.
Determine under which conditions either party may withdraw from all negotiations. Mention that the deal is contingent on the findings of due diligence, as long as everything is in order as presented. Any surprises during due diligence should give the buyer the permission to walk away.
Even though the LOI is not a legal document, it is still a good idea to have a lawyer assist in its creation. That way, the buyer may avoid any sticky situations that may arise from poorly worded clauses.
The best way to ensure that the LOI is not only correct but also beneficial to the buyer is to employ the help of an M&A intermediary. The intermediary will be well-versed in the mechanics of an M&A deal, and therefore will work to assist in finding the right business for the best price.
To speak with an M&A intermediary today, please contact George & Company. We would be happy to help you through the entire deal process to ensure that everything runs smoothly.