In M&A deals, a letter of intent (“LOI”) is one of the most important steps of the transaction. It helps establish all the details of the deal at hand—yet many people don’t realize its importance, leading to mistakes and extra stress. With the help of Gordon Law, we’ll make this whole process a smooth operation. Let’s take a closer look at the role a letter of intent will play in your next M&A deal.
What is an M&A Letter of Intent?
At first glance, you might think the letter of intent is a simple document that you can write yourself. However, it is one of the most important documents when it comes to M&A negotiations. It’s a structured process that lays out all the details about any potential deal — from how much money each company will invest to how long their current agreements will last once the acquisition goes through.
“You have to state the parties, what’s being sold or bought, and if the companies are merging, then who’s merging where,” says attorney Michael Brandwein, Manager of Tax Compliance and Corporate Law. “The price is very important, along with other special considerations like confidentiality.”
The LOI may also include details regarding asset purchases, any assumed liabilities, and the timeline for the due diligence phase of the transaction.
Is a Letter of Intent a Binding Contract?
Generally, a Letter of Intent has some binding terms and some non-binding terms.
However, “It’s all up for negotiation,” says Brandwein. “You could have all of it be binding, or you can choose which sections are binding and which are non-binding.” Certain details of the transaction may change, especially after performing due diligence, and the structure of your LOI will play a key role in how such changes play out.
LOI Binding Provisions
In most cases, the binding provisions within a Letter of Intent include:
- Exclusivity (No shop clause): Prevents seller from finding another buy in the middle of the negotiation
- Confidentiality: Prevents the disclosure of information shared between the two parties presented to the public before the deal is done
- Expenses: These can include filing fees, broker fees, and legal fees
- Earnest money deposit: Typically, this will disclose whether or not the earnest money used in the agreement is refundable or not
- Access for due diligence: This refers to the right the buyer has to perform due diligence by performing tasks such as meeting with employees, going over company finances and records, etc.
LOI Non-Binding Terms
The non-binding terms within an LOI are there because the buyer has the right to change the terms based on what is uncovered during M&A due diligence. Although important in their own right, these terms can change and thus hold less weight than the binding terms in the LOI.
Typical non-binding terms within an LOI include:
- Structure: Basic outline of the deal. The structure refers to components that make up the transaction (i.e., Are you buying the whole company or only certain assets? Are you taking on any liabilities?)
- Management arrangements: Some, but not all, LOIs can have a line item that states what the buyer plans to do with existing management within the target company
- Purchase price: Amount of purchase proposed by the buyer, as well as the form of payment
- Key closing conditions: A list of any approvals and/or agreements to be made at closing
What Components Make Up a Letter of Intent?
While the letter itself can vary from case to case in terms of the exact content, there are certain key points that should be a part of any strong LOI.
Typical terms within a Letter of Intent:
- Exclusivity: A clause that strictly prohibits the seller from soliciting or negotiating offers from other parties after the LOI is signed
- Purchase price and specific terms: The final price of the purchase, as well as all additions and subtractions to the overall cost and assets included in the cost
- Closing conditions: Approvals, agreements, or similar items that must be accounted for before officially closing
- Assets and liabilities: A full list of assets and liabilities that are included within the deal, including, but not limited to, working capital
- Considerations: Cash, stock, notes, etc
- Ongoing role and compensation for seller: If the seller will continue to be a part of the business, the terms of that employment or partnership, including pay, must be outlined
- Outlined process for due diligence: This includes the agreed upon amount of days the buyer is allowed to perform due diligence
- Deadline for close: Agreed upon date for the closing of the LOI
Your particular situation might call for less frequently used terms to be included, such as: earnest money, employee and/or customer access, termination details, holdback obligations, and more. Contact our experienced M&A attorneys for guidance tailored to your deal.
Typical Structure of an M&A Letter of Intent
Although the process of gathering all the necessary information for an LOI can be difficult and time consuming, the layout of the letter itself is pretty straightforward. Typically, the structure is as follows:
- Intro
- Structure of the proposed deal
- All included indemnification obligations
- This section covers your options for recourse if the business has a substantial negative downturn after closing the deal
- Closing conditions for transaction
It’s always in your best interest to have a knowledgeable M&A attorney help you create and review your Letter of Intent as you prepare for the due diligence phase.
Set Yourself Up for Success With Gordon Law
Now that you understand the basics around letters of intent within M&A transactions, it’s time to get to work on yours. Our team of experienced business law attorneys will help you ideate, plan out, and craft the ideal letter of intent for your upcoming merger or acquisition. To schedule a consultation, or to ask any questions you may have, contact us today.
