The letter of intent is important to set the tone of negotiations, but it’s not the ultimate step of an acquisition. Here’s a guide to do it right.
The world of business acquisition is thrilling, but before diving headfirst into negotiations, a crucial first step paves the way for a smooth transaction: drafting a Letter of Intent (LOI). This document serves as a roadmap for both buyer and seller, outlining the key terms of the potential acquisition and setting the stage for a successful deal.
In this article, we will explore how to write an LOI properly so that the transaction you’re looking forward to making is successful.
Also known as a Letter of Interest, it is a document that expresses a buyer's serious interest in purchasing a business. It outlines the main points of the potential transaction, including the purchase price, payment terms, due diligence process, and a timeline for completing the sale.
While not always legally enforceable, a Letter of Intent establishes a negotiation framework and demonstrates the buyer's commitment to the process. It also works as a way of committing to the seller but not as seriously enough, so you can’t break the deal if factors change during the negotiation.
"If things go bad, you need to be ready to walk away. An LOI is not a firm commitment, and if the rules of the game change during that time, you need to change your perception of the game", says Pascal Levy-Garboua, CEO of Noosa Labs.
The LOI has benefits for all parties involved.
An effective LOI should be clear, concise, and cover the essential aspects of the proposed acquisition. Here's a breakdown of the key elements to include:
Start by stating the purpose of the document – expressing your interest in acquiring the business, and identify both parties involved, including the buyer's name and the seller's business name.
Briefly describe the type of merger or acquisition being proposed. Are you interested in purchasing the entire business, specific assets, or a controlling interest in the company?
Outline a proposed purchase price range, which can be a single number or a bracket, acknowledging the need for further due diligence before finalizing the price. Specify the form of payment (cash, stock, or a combination).
Define the process by which the buyer will thoroughly examine the business's financial records, legal standing, and operational details. Outline the timeframe for due diligence and specify any information the seller needs to provide.
List any conditions that must be met for the deal to be finalized. Examples include securing financing, obtaining necessary regulatory approvals, or satisfactory completion of due diligence.
This clause grants the buyer exclusive negotiation rights with the seller for a pre-determined period. This prevents the seller from entertaining offers from other potential buyers.
Indicate a target timeframe for completing the sale and a closing date. This provides a clear sense of direction for both parties.
Include a confidentiality clause prohibiting both parties from disclosing the details of the Letter of Intent or any sensitive business information to unauthorized third parties.
Clearly state that the LOI is non-binding and does not constitute a legally binding contract.
There's no one-size-fits-all template for an LOI. However, you can structure your document based on the following:
Here is a sample structure to get you started. By following these guidelines and tailoring the content to your specific situation, you can craft a Letter of Intent that paves the way for a smooth and successful business acquisition.
In general, a Letter of Intent is not legally binding. It functions more as a roadmap for future negotiations and expresses the good faith of both parties involved to reach a final, legally enforceable agreement.
However, there are some exceptions. Even if the overall LOI is stated as non-binding, certain clauses can be crafted to be legally enforceable.
This often applies to confidentiality agreements or provisions restricting the parties from pursuing other deals while negotiations are ongoing. Also, if the language used in the LOI is vague or ambiguous, a court could interpret it as a binding contract, especially if the parties acted in a way consistent with the LOI. To avoid any confusion, it's best to have a lawyer review your LOI and ensure it clearly states whether it's binding or non-binding, as we specified in our previous LOI example.
Once you've done preliminary research on the business you want to buy and have a good understanding of its financial health and potential, you can draft the letter of intent.
In other words, the best time to draft your LOI is after the due diligence and before negotiating definitive agreements to signal your formal interest in proceeding with the deal.
While an LOI is not a complex legal document, consulting with a business lawyer is highly recommended. They can ensure the document accurately reflects your interests and protects your rights.
Boopos offers guidance through the negotiation process, ensuring you get the most favorable terms for your acquisition. Explore our listings and get support from our advisors!
